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Lifting the corporate veil

Lifting the corporate veil is regulated in the Company Law (further: CL). The law defines the persons responsible and the conditions under which the corporate veil is lifted.  

Lifting the corporate veil is an efficient means of fighting against the unlawful behavior of the founder, or other shareholders of a company. Unfortunately, the efficiency of the practice is not fully utilized since trustees, the people whom this practice was meant for, are not aware of it. Consequently, the law practice is not completely applied in these cases.

Before further analysis, we will point out the regulations regarding general partners, shareholders, and partners of the limited liability companies since the procedure of lifting the corporate veil refers to these persons, that is to say, it serves as a measure against their embezzlements.

Limited partner:

  • is a member of limited partnership (there must be at least one limited partner in this partnership)
  • has a restricted responsibility. The limited partner is liable only for the invested funds in the company, whereas the general partners have unlimited liability.
  • is not liable for the company’s liabilities if he fully paid in the contribution undertaken in the incorporation
  • is liable as a general partner to third parties if his name, with his approval, was entered into the limited partnership’s business name.
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Member of limited liability company (further: LLC member):

  • Company members are not liable for the company’s obligations if he/she fully paid in the contribution specified in the founding contract
  • If a limited partner fails to fully pay up the contribution he undertook to pay by the incorporation agreement, he/she is liable restrictedly up to the amount of unpaid or not entered contribution.

Shareholder:

  • is not liable for the company’s obligations
  • faces the business risk up to the amount of entered contribution. If the business is not running well, it is the maximum amount they can lose.

What is lifting the corporate veil?

The forms on the business organizational specter are undoubtedly different. However, both limited partners, LLC members, and shareholders are not liable for the company’s obligations. The companies and members are separate legal subjects, their properties are separate, so as their responsibilities. This fact can be misused in several ways and harm the stakeholders. To prevent this, the legal system of the Republic of Serbia has brought in the concept of lifting the corporate veil. This is an exception to general rules on responsibility with the aim of putting an end to various ways of unlawful misuse.

Lifting the corporate veil can shortly be described in the following way: if the position was misused by the persons and in ways stipulated by the Law, the creditor can file a lawsuit against them. If the prosecutor proves that the defendant misused the position, the defendant will not be able to hide behind the company and the right to not be liable is not applicable anymore.

Who does this rule apply?

This rule is finalized with filing the lawsuit. Therefore, there are three parties involved: a person with the capacity to sue (the prosecutor), a person with the capacity to be sued (the defendant), and the court that decides on the lawsuit.

The person with the capacity to sue (prosecutor):

  • A Conditor
  • The burden of proving the guilt is on him/her, i.e. they need to state the facts and pieces of evidence. These facts must show that the defendant abused the position for which he is tried.
  • The deadline for filing a lawsuit is six months from the day the one has found out about the abuse (subjective deadline), but if the claim has not been filed, the mentioned deadline is counted from the day of the claim becomes due.
  • The lawsuit may be filed within 5 years from the day of the abuse (objective deadline)

The person with the capacity to be sued (defendant):

  1. Limited partner;
  2. LLC member;
  3. Shareholder;
  4. Legal representatives of these persons if they are legally incapacitated.

The court:

  • The jurisdiction of the court is defined according to the residence of the company whose member is being sued.

Abuse of the rule of limited liability as the reason for lifting the corporate veil

A company member is held liable for all company’s obligations if he/she has abused the rule of limited liability. The abuse is a broad term which is better specified in the CL by defining the abuse if a person:

  1. Uses the company to achieve a goal otherwise forbidden to him
  2. Uses the company’s assets or uses them as if they were his own
  3. Uses the company or its assets with the purpose of damaging the company’s creditors
  4. In order to procure personal gain or gain for third-parties reduces the company’s assets, although the person was aware or had to be aware that the company would not be able to fulfill its obligations.

The mentioned bases are exempli causa. Namely, the abuse must be closely defined, since only the typical cases are mentioned. If some other abuse is proven by the prosecutor, the practice of lifting the veil is expected to be conducted.

Unfortunately, lifting the corporate veil still rarely occurs in law practice.

For all questions and consultations regards to company and commercial law, you can contact our team of lawyers.

Date: 18.04.2020.

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