Legal Question in Bankruptcy in Massachusetts

Re: bAnkruptcy

Principals of a corporation, as a first rule, are not liable for its (the corporation's) debt.

There are a host of exceptions. Obviously if a principal ever co-signed a note or personally guaranteed a mortgage, that rule is changed. If the corporation was used for "ultra vires" (let's say, improper) purposes, such as buying personal stuff for use by the principals that had nothing to do with the business of the corporation, for example, obviously the principals can be found to be liable. There are a variety of ways in which a fraud like that will end up allowing a creditor to "pierce the corporate veil." Also, there are a list of factors that courts look at it to determine if this corporation was for real or just a shield. Between corporations, for example, if there's no separation of function and purpose and paperwork, and especially checking accounts and funds, the courts will allow a creditor to "look through" a corporation to the owner(s). (A thinly capitalized corporation, i.e., one that even in good times was treated just like another checkbook of the owner, doesn't stand much chance.)

If the debts are tax-related, there is a higher probability of there being a personal liability, for example, by those authorized to sign the returns.

Bankruptcy has some other things going on, e.g., preferences which can look back a year or two and see who got paid money that ends up depriving the creditors today of payment.

But, in spite of all the exceptions, the general rule is that a proper corporation making proper use of it's money will shield the owners and the officers as well.