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Behind the corporate veil – Liability of shareholders in Europe

Szendrei Tamás
Szendrei Tamás

1. Introduction

Companies represent „fictious” entities, which are part of our economic system and our everyday life. They employ people, develop our communities and nations, and have become our method of doing business. In order to provide a well-balanced legal environment for both natural and legal persons it is necessary to impose adequate controls over the conduct of companies in order to avoid and prevent deceitful and fraudulent demeanour, such as money laundering, corruption, hiding and shielding assets from creditors and other claimants, illicit tax practices, self-dealing, or market fraud and circumvention of disclosure requirements.[1]

For this purpose it can be brought into discussion, among others, the possibility of applying the doctrine piercing the corporate veil, particular to the American Law. This doctrine can be found in the classic spirit of the American jurisprudence, according to which, “where the corporate form is used by individuals for the purpose of evading the law, or for perpetration of fraud, the court will not permit the legal entity to be interposed so as to defeat justice”.[2]

When courts pierce the corporate veil, they make an exception to two fundamental principles of company law: One is the separate legal personality, and the second is the limited liability. Piercing the corporate veil can be defined as “the judicial act of imposing personal liability on otherwise immune corporate officers, directors, or shareholders for the corporation’s wrongful acts.”[3]

2. Legal personality and limited liability in Europe and particularly in the Romanian legal system

In these jurisdictions the extent of the legal person’s liability or of its authorities to the third parties, with reference to the law of its organic statute, establishes that the legal person is liable to the third parties with its own patrimony or if the third parties beneficiate from a right of general pledge also over the patrimony of the shareholders/the authorities of the legal person.[4]

The limited liability represents, in doctrine, a significant characteristic which distinguishes between the companies with legal personality and partnerships. The limited liability offers protection to the goods pertaining to the shareholders against the claims of the corporate creditors, while the legal personality confers protection to the corporate goods against personal creditors’ claims of the shareholders.

Under the Romanian law, the limited liability is particular to the joint stock company and the limited liability company, regulated by the Law no. 31/1990, republished, these forms being preponderant in Romania. Companies with legal personality and limited liability, under the Romanian law, represent a good form of protection of the partners/shareholders to the claims of personal creditors and, concomitantly, a means of protection of partners/shareholders’ assets to the claims of corporate creditors.

3. Behind the corporate veil in Europe

All jurisdictions offer doctrinal tools for holding shareholders liable for the debts of the companies, although, the use of these tools is restricted to controlling or managing shareholders who are found to have abused the corporate form.[5] These systems permit courts to pierce the corporate veil in extreme circumstances, in order to hold controlling shareholders or the controllers of corporate groups personally liable for the company’s debts. Achieving this, the courts do not set aside the corporate form easily.[6]

The veil piercing is permitted when the controlling shareholders disregard the integrity of their companies by failing to take care of formalities, intermingling personal and company assets with each other, or failing to capitalise the company adequately. In France, for example, insolvency procedures can be extended to shareholders that disregard the integrity of their companies.[7]

Piercing of the corporate veil doctrines in the EU are occasionally used to protect creditors of corporate groups. German law provides an elaborated example in this regard, attempting to balance the interests of groups as a whole with those of the creditors and minority shareholders of their individual members. If the parent company has not entered into a contract of domination, it must compensate any subsidiaries that it causes to act contrary to the subsidiary’s own interests. In this case, the creditors of the subsidiary branch may sue the parent’s directors for damages.[8]

In Belgium, group liability may arise whenever a company controls or manages another company, and performs certain acts or omissions which are either contrary to the controlled or managed company’s corporate interests, or constitute a violation of the law (including torts law) or the controlled company’s by-laws.[9]

There are also several cases in EU level relating to piercing the corporate veil doctrine. In AKZO decision[10], the European Court of Justice held that complete share ownership establishes a presumption that the parent exercises control over the subsidiary, so in this case, the parent company and the subsidiary companies will be treated as a single economic entity. Continuing the logic line of previous cases, the Court affirmed in the Michelin v. Commission case[11]

In the approach of the ECJ a shared ownership establishes rebuttable presumption that the parent exercises control over the subsidiary. The burden then falls on the parent to demonstrate that the subsidiary possesses commercial autonomy. Another interesting aspect of the EU law is that not only does the parent become liable for the subsidiary’s fine, moreover, parent company’s revenue will also be taken into account for the calculation of the fine. So, the EU approach not only shifts liability, but it actually expands it. As a consequence, the limited liability of companies weakens, whereas the liability of the group increases.

In the Case C-186/12 in Impacto Azul Lda v. BFSA 9 Promoção e Desenvolvimento de Investimentos Imobiliários SA, Bouygues Imobiliária – SGPS Lda, Bouygues Immobilier SA, Aniceto Fernandes Viegas, Óscar Cabanez Rodriguez[12], the ECJ interpreted under preliminary ruling the provisions of the Portuguese law on companies in a control relationship that, which forms part of Title VI of the Code on Commercial Companies. According to this provision, parent companies seated in Portugal and abroad are treated differently. Where the first are liable for the claims of creditors under the principle of the joint and several liability of the parent company, in the reverse case, the others are not.

The ECJ has to respond to the question whether such discriminatory treatment of the parent companies by the Portuguese law, is precluded by Article 49 TFEU.

The CJEU ruled that, given that the law on corporate groups has not yet been harmonized on the EU level, the Member States remain responsible for the law determining the relationship between the parent and subsidiary.

Thus, imposing liability does not create a restriction of the freedom of establishment within the meaning of the Article 49 TFEU.

This ruling can be interpreted from a perspective that, Member States of the EU have not yet come to the same determination of holding parent companies, which are controlling companies liable together with their subsidiaries in case of direct or indirect control.[13]

There is no general European Union rule on the piercing of the corporate veil doctrine. Neither company law nor tort law is sufficiently harmonized to be able to speak of much EU influence in this field. The differences between the jurisdictions are quite large, but steps are slowly being taken towards the application of the piercing the corporate veil doctrine in the Central and Eastern European region.[14]

As we can see, in case of company groups where only companies, and no natural persons, are behind a subsidiary, the ration of the limited liability, to protect the natural persons behind the company, has no relevance. In these cases, it can be easily accepted to go behind the corporate veil. Setting up a subsidiary often does not involve a new risky investment but is a mere restructuring of existing activities.[15]

4. Piercing the corporate veil possibilities in the Romanian legal system

De lege lata, the Romanian legislation has forms of extension of liability only in the circumstance under which the legal personality ceases, as a consequence of the dissolution, either by means of the procedure of insolvency, or in the cases regulated by the Companies Law no. 31/1990.

The possibility of attracting the personal liability of the partners under the procedure of insolvency regulated the Insolvency Code – Law no. 85/2014, according to art. 174 para. 1 which statutes that in the case when the report issued by the official receiver identifies persons to whom it would be imputed the occurrence of the debtor’s insolvency state, the syndic judge could dispose that a part of the debtor’s (legal person) liability, arrived to insolvency, to be born by the members of the management and/or supervision authorities within the company, as well as by any other individual who caused the creditor’s state of insolvency.

The syndic judge decides the attraction of the liability to the extent to which it is proventhe existence of one of the facts restrictedly enlisted in the legal text, which he circumstantiates within the context of flagrant liability, which presumes the existence of the prejudice (caused to the creditor), of the illicit fact, of the guilt and the relationship of causality between fact and prejudice.

Art. 237 index 1 para. 3 and 4 of the Companies Law no. 31/1990 provides that the shareholder who abuses of the limited character of his/her liability and of the distinct legal personality of the company, by disposing of the company’s assets as if they were his own or who decreases the asset of the company in his/her or a third party’s benefit, in the case of dissolution, it will unlimitedly be liable for the unpaid obligations of the company. Paragraph 3 states that: “The shareholder who, to the detriment of creditors, abuses the limited nature of his liability and his legal personality different than that of the company is unlimitedly liable for the due liabilities of the dissolved, respectively liquidated company”. More details are provided by Paragraph 4: „The liability of the associate becomes unlimited under the terms

of paragraph (3), especially when such associate disposes of the company assets as if they were his own or diminishes the company assets in his own personal benefit or in the benefit of third parties, knowing or having to know the fact that in such way the company shall not be able to perform its obligations.” However, the creditors can only exercise the rights in case of the company’s dissolution, which has limitative causes.[16]

This extension of liability, even if it has as premise the loss of the legal personality, is founded on the concept of abuse, expressed under the form of liability in tort. Furthermore, it can be encouraging, that the jurisprudence of the European Court of Human Rights started as well from the hypothesis of the company’s dissolution. Then the ECHR judicial practice evolved, conferring self-liability exactly to the Romanian State, as shareholder of certain companies to a creditor.[17]

Another possible application of the doctrine piercing the corporate veil under the Romanian law is represented by the case regulated by art. 202 para. 2 index 3 of the Law no. 31/1990 corporate creditors and any other prejudiced persons by means of the shareholders’ decision on the transfer of shares may formulate an opposition form by means of which the court is solicited to oblige, if applicable, the company of the shareholders to the reparation of the caused prejudice, as well as, if applicable, the attraction of the civil liability of the shareholder who intends to transfer his/her shares.

Furthermore, if the entitled persons exercise this right of opposition to the cession of shares, the court has the possibility to dispose the extension of the liability, regularly limited, of the shareholder who transfers his/her shares, thus creating a certain prejudice to a creditor. The effects of the admission of the opposition do not bear down on the legal personality, do not affect the shareholders decision on the cession, but strictly envisage the reparation of the prejudice caused to the creditor. Nevertheless, this procedural tool is exclusively acknowledged in the case of the limited liability company. This legislative solution also has the deficiency the effects of the admission of such opposition over the shareholders’ decision is not established concretely, irrespective of the fact that the court admits the extension of the transferor shareholder’s liability.

The New Romanian Bankruptcy Law no. 85/2014 at art. 169 states that at the request of the insolvency/liquidation trustee, the bankruptcy judge may hold liable the members of the management or supervisory boards, as well as any other persons that have contributed to the insolvency of the debtor, in any of the ways described by the law. The last part of the normative text: „and any other persons that have caused the insolvency” induce the conclusion, that piercing the corporate veil, both against shareholders or managers as well as against the parent company, is possible at least on a theoretical level.[18] This new provision is a huge step forward in the inclusion of piercing the corporate veil theory in the Romanian bankruptcy law[19], as the previous version of the normative act did not cover those persons involved – directly or indirectly – in the control of the company.[20]

Even in the absence of a clear and more specified doctrine of piercing the corporate veil in the Romanian Legal system, in certain cases, the extension of the shareholder’s liability is possible, to the extent to which he/she abuses of these limits. This is also because the European doctrine has explained that the Member States have the possibility to maintain, legally or jurisprudentially, certain provisions which would allow, in determined cases, the direct liability of the shareholders for the company’s debts, according to the principle of lifting the corporate veil.[21]

Some well-known scholars and practitioners attempted to approach the possibility of receiving, at least jurisprudentially, the doctrine of piercing the corporate veil.[22] However, certainly there is a need of a self-standing regulation for the extension of the shareholders liability under the Romanian law, without this being particularly related to the disappearance of the legal personality, in order to protect creditors, be them private or public institutions.

In order to provide an effective right for the creditors to of claiming, in court, the acknowledgement of the shareholders’ abuse in the development of the company’s life, a solution can be de lege ferenda, the introduction of a new well-defined legal provision, based on the theory of abuse of rights, in compliance with the art. 15 of the Romanian New Civil Code.

Applying this measure, the satisfaction of the creditors’ rights would be ensured, alternatively, either from the company’s assets constituted by continual activity, with the possibility to exercise the action in regress against the shareholders who abused of the legal personality, or the proper patrimony of the guilty shareholders, while eliminating the barrier generated by the uneasy procedural framework, presently, in which is brought into discussion the subsistence of the legal personality.[23]

5. Conclusion

Piercing the corporate veil doctrine is a highly debated subject of the contemporary company law, since it involves a renouncement from the legal certainty represented by the separation of patrimonies, the limited liability of the shareholders and administrators, for the achievement of justice, protection of creditors in several cases. The solution to pierce the corporate veil should be a decision taken cases by case by the courts, in the light of a number of factors. The judge has to evaluate carefully which is the highest interest that should be protected.[24] The decision of breaking what is legally established and known, such as legal personality and limited liability by the court, has to be based on serious reasons analyzed and explained by the court.

However there is a need for a clear normative framework, which give not only a theoretical chance, but a determined procedure to apply the doctrine of the piercing of the corporate veil. The benefits of the corporate veil piercing doctrine cannot be denied, and the doctrine should be implemented in a form that would allow its application through all the legal sectors while stipulating specific conditions that would have to be fulfilled. The shield created by the legal personality, which, generally, also confer the advantage of the liability’s limitation shouldn’t provide protection for the shareholders in case of abuse anymore. An effective legislation in this relevant field would be a warning for the investors to take into account that they can’t have an abusive conduct and hide behind the corporate veil.

Bibliography

I. Monographs and Articles
1. Albana Karapanço, Ina Karapanço, The Piercing of the Corporate Veil Doctrine: A Comparative Approach to the Piercing of the Corporate Veil in European Union and Albania, Academic Journal of Interdisciplinary Studies, Vol. 2, No. 9, MCSER Publishing-Rome, Italy, October, 2013;
2. Alexandra Horvathova, Cătălin Gabriel Stănescu, Piercing the Corporate Veil: US Lessons for Romania & Slovakia, May 24, 2012. Available at SSRN: https://ssrn.com/abstract=2066030 or http://dx.doi.org/10.2139/ssrn.2066030;
3. Alina Oprea, Observaţii privind regimul persoanelor juridice în dreptul internaţional privat român din perspectiva reglementărilor din noul cod civil, Studia Universitatis Babeş-Bolyai, Iurisprudentia, no. 3/2011, http://studia.law.ubbcluj.ro/articole.php?an=2011;
4. Anca Sorina Popescu-Cruceru, Eugenia-Gabriela Leuciuc, Considerations on the Enforcement of the Doctrine of Piercing the Corporate Veil in Romania, International Journal of Academic Research in Business and Social Sciences, No. 7, Vol. 4, July 2014;
5. Bainbridge Stephen M., Abolishing Veil Piercing, Journal of Corporation Law 26, 2001;
6. Behind The Corporate Veil: Using Corporate Entities For Illicit Purposes, OECD, 2001;
7. Emmerich Volker and Haserback Mathias, Konzernrecht, Eighth Edition, 2005;
8. Erik Werlauff, EU Company Law. 2nd edition, DJOF Publishing Copenhagen, 2003;
9. Gheorghe Piperea, Drept comercial. Intreprinderea, ed. C.H.Beck, Bucureşti, 2012;
10. Kanda Hideki, Davies Paul, Hopt Klaus J. and Kraakman Reinier, The Anatomy of Corporate Law: A Comparative and Functional Approach, Oxford University Press, Second Edition, 2009;
11. Paul Hughes, Competition Law Enforcement and Corporate Group Liability – Adjusting the Veil, ECLR – European Competition Law Review, 2014;
12. Piercing the corporate veil, Black’s Law Dictionary, 9th ed., 2009;
13. Stanciu Cărpenaru, Vasile Nemeș and Mihai Hotca, Law no. 85/2006 on insolvency proceedings, with comments, ed. Hamangiu, 2006;
14. Stefan Messmann & Tibor Tajti, The Case Law Of Central And Eastern Europe, 2007;

II. Judicial decisions and Legal resolutions
1. C-186/12 Impacto Azul Lda v. BFSA 9 Promoção e Desenvolvimento de Investimentos Imobiliários SA, Bouygues Imobiliária – SGPS Lda, Bouygues Immobilier SA, Aniceto Fernandes Viegas, Óscar Cabanez Rodriguez;
2. C-97/08, Azko Nobel NV v. Commission, 2009, E.C.R. I-8237;
3. C-T203/01 Michelin v. Commission, 2003, E.C.R. II-4071;
4. Law no. 287/2009 on the New Romanian Civil Code;
5. Moldoveanu v. Romania (no. 13386/02) ECHR decision on 29.07.2008;
6. Aurelia Popa v. Romania (no. 1690/05) ECHR decision on 26.01.2010;
7. Romanian Companies Law no. 31/1990;
8. Supreme Court of Minnesota, Erickson v. Revere Elevator Co., 110 Minn 443, 444, 126 N.W. 130 (1910), in Canfield 1917;
9. The New Romanian Bankruptcy Law no. 85/2014;


[1] More on the use of corporate entities for illicit purposes and mechanisms to prevent the misuses of corporate vehicles see Behind The Corporate Veil: Using Corporate Entities For Illicit Purposes, OECD, 2001;
[2] Supreme Court of Minnesota, Erickson v. Revere Elevator Co., 110 Minn 443, 444, 126 N.W. 130 (1910), in Canfield 1917;
[3] Piercing the corporate veil, Black’s Law Dictionary, 9th ed., 2009;
[4] Alina Oprea, Observaţii privind regimul persoanelor juridice în dreptul internaţional privat român din perspectiva reglementărilor din noul cod civil, Studia Universitatis Babeş-Bolyai, Iurisprudentia, no. 3/2011, http://studia.law.ubbcluj.ro/articole.php?an=2011
[5] Kanda Hideki, Davies Paul, Hopt Klaus J. and Kraakman Reinier, The Anatomy of Corporate Law: A Comparative and Functional Approach, Oxford University Press, Second Edition, 2009, p. 138
[6] Bainbridge Stephen M., Abolishing Veil Piercing, Journal of Corporation Law 26, 2001, p. 479
[7] Commercial Code of France, art. 621 paragraph 2, art. 631 paragraph 7, art. 641 paragraph 1
[8] Emmerich Volker and Haserback Mathias, Konzernrecht, Eighth Edition, 2005, paragraph 302, paragraph 309, p. 446-447
[9] Grégory De Sauvage – CMS DeBacker, Piercing the corporate veil?, 19. June 2012, http://www.lexology.com;
[10] C-97/08, Azko Nobel NV v. Commission, 2009, E.C.R. I-8237, paragraphs 55, 58-62
[11] C-T203/01 Michelin v. Commission, 2003, E.C.R. II-4071, paragraph 290
[12] C-186/12 Impacto Azul Lda v. BFSA 9 Promoção e Desenvolvimento de Investimentos Imobiliários SA, Bouygues Imobiliária – SGPS Lda, Bouygues Immobilier SA, Aniceto Fernandes Viegas, Óscar Cabanez Rodriguez para. 31
[13] Alexandra Horvathova, Cătălin Gabriel Stănescu, Piercing the Corporate Veil: US Lessons for Romania & Slovakia, May 24, 2012. Available at SSRN: https://ssrn.com/abstract=2066030 or http://dx.doi.org/10.2139/ssrn.2066030
[14] Stefan Messmann & Tibor Tajti, The Case Law Of Central And Eastern Europe, 2007, p. 33-186.
[15] Paul Hughes, Competition Law Enforcement and Corporate Group Liability – Adjusting the Veil, ECLR – European Competition Law Review, 2014, p. 75.
[16] The general cases of dissolution of companies as well as special cases of dissolution of companies where the shareholders’ liability is limited is regulated by art. 227, 228 and 229 of the Companies’ Law no. 31/1990
[17] Moldoveanu v. Romania (no. 13386/02) ECHR decision on 29.07.2008; Aurelia Popa V. Romania (no. 1690/05) ECHR decision on 26.01.2010
[18] Alexandra Horvathova, Cătălin Gabriel Stănescu, Piercing the Corporate Veil: US Lessons for Romania & Slovakia, May 24, 2012, p. 15.
[19] Even more after 2018, with the introduction of paragraph 2 of article 169 – Law no. 85/2014, the creditor who holds more than 30% of the value of the receivables entered in the credit table, can bring the claim in the court, under same conditions as the insolvency/liquidation trustee.
[20] Stanciu Cărpenaru, Vasile Nemeș and Mihai Hotca, Law no. 85/2006 on insolvency proceedings, with comments, ed. Hamangiu, 2006, p. 326.
[21] Erik Werlauff, EU Company Law. 2nd edition, DJOF Publishing Copenhagen, 2003 pp. 40.
[22] Gheorghe Piperea, Drept comercial. Intreprinderea, ed. C.H.Beck, Bucureşti, 2012, pp. 383-384.
[23] Anca Sorina Popescu-Cruceru, Eugenia-Gabriela Leuciuc,  Considerations on the Enforcement of the Doctrine of Piercing the Corporate Veil in Romania, International Journal of Academic Research in Business and Social Sciences, No. 7, Vol. 4, July 2014, p. 478.
[24] Albana Karapanço, Ina Karapanço, The Piercing of the Corporate Veil Doctrine: A Comparative Approach to the Piercing of the Corporate Veil in European Union and Albania, Academic Journal of Interdisciplinary Studies, Vol. 2, No. 9, MCSER Publishing-Rome, Italy, October, 2013, p. 7.


Szendrei Tamás

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