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Introduction to the Law of Corporations: Cases and Materials

Walkovszky v. Carlton

The default rule for the corporation is that stockholders face limited liability for the debts of the corporation. The liability of stockholders is limited to the capital they contributed to the corporation. For instance, if a stockholder contributes $100 in equity capital to the corporation by buying stock from the corporation for $100 (assume this represents all the equity capital available to the corporation), and if the corporation has $150 in debts, the corporation may be required to pay all of its equity capital (i.e. $100) to settle the corporation's debts. In most circumstances, stockholders will not be liable for the balance of the corporation's debt of $50. The liability of stockholders is thus limited to only their capital contributions.

Although limited liability as described above is the default rule, in extreme cases courts may look through the corporate form, or "pierce the corporate veil", and assign liability for corporate debts to stockholders.

The following case is paradigmatic. The owner of the corporation has obviously established the corporations in question specifically to limit his exposure to debts of each of the corporations he controls. In deciding whether the stockholder should receive the benefit of corporate limited liability, the court lays out an equitable test to determine whether it should look through the veil of limited liability protection and find the shareholders liable for the debts of the corporation.

If the corporation is a mere "alter ego" of the stockholders (e.g. if the corporation is operated without formality and for mere convenience of its stockholders) and the stockholder used the corporate form to engage in some injustice, it is more likely, though not certain, that a court will look through the corporate form and assign corporate liabilities to stockholders in order to prevent a fraud or inequitable result.