The corporate veil is hard to lift
There may be little the head office employees can do to recover redundancy compensation owed given the company may not exist for much longer, and there is no doubt a long line of creditors queueing up to extract their pound of flesh. They also face another difficulty in that the company they are employed by apparently has no assets.
First Union which represents many of the affected employees has said it will start legal proceedings seeking to ensure all redundancy entitlements are paid out to all affected staff including those in the head office.
Businesses like Pumpkin Patch operate through what are known as limited liability companies. In simple terms, this means the company or companies exist as legal entities in their own right and are separate from the actual owners.
Consequently, it is the company that will be responsible for any liabilities that the business incurs, rather than the owners. If the company fails, the owners are generally protected from the financial fall out. This separation between a company and its owners is known as the ‘corporate veil’.
There are situations where the corporate veil may be lifted, or in other words, where the owner of a company may be made personally liable for moneys owed by the business. However, these situations are rare in employment law.
Ordinarily, the corporate veil tends to remain in place even when an employee has successfully pursued a claim in the Employment Relations Authority or Employment Court, and established that they are owed money by their employer.
Regardless of whether the employer is in the wrong, if the company does not have the money or any assets it can use to pay, then the employee will usually be plain out of luck. The most obvious scenario where the corporate veil might be lifted is where the owner of an employer company that is faced with a legal claim deliberately withdraws the company’s money and assets. Sometimes these assets are transferred to a new legal entity through which the owner intends to trade going forward.
The intention is to make the employer ‘judgment proof’ so that if it is ordered by a court to pay anything, it will be unable to do so with its former assets being kept out of reach.
Where the authority or court is satisfied that this has occurred, and that the intention is to sidestep liability arising from the legal claim, the owner may be ordered to pay the employee any amounts owing. Alternatively the new legal entity could be ordered to pay the employee. But the situations where the authority or court have even considered making such orders have historically been few and far between.
Susan Hornsby-geluk is partner at Dundas Street Employment Lawyers.