Legal Issues in Loan Leverage - Assignment Example

This recognition means that a corporation can enter into contracts and incur liabilities in its capacity. The liabilities of the corporation belong to the corporation and cannot be extended to its shareholders. Courts respect the separate personality of corporations and do not hold shareholders liable for the corporation's liabilities. However, the courts occasionally disregard the separate personality of corporations in a process called piercing the corporate veil. The corporate veil can only be pierced if the corporation was incorporated fraudulently or fails to observe corporate formalities (Ireland, 2008).

In this case, the corporation failed to observe corporate formalities. The corporation also used a web of interrelated entities to provide a false appearance that it was financially sound.

The court pierced the corporate veil and found the shareholders personally liable for the liabilities incurred by the corporation.