Legal Analysis on the Doctrine of Piercing of the Corporate Veil

Introduction

The doctrine of piercing the corporate veil is one of the most confused areas of company law. This argument is a result of the vague examinations on this field of law. Due to the volume of the cases which deal with the aim of this doctrine, the courts should have gone beyond rather than just the focus on the specific circumstances of a case. However, many scholars have tried to present different approaches, explaining the scope and the reasons why piercing the corporate veil doctrine has an important role in the field of Company law, focusing so in two types of companies such as Limited Liability Companies and Joint Stock Companies. These theories will be presented in the following chapters of the paper. While showing different theories as per the scope of this doctrine, scholars supporting their arguments in different provisions of the law, do agree that the only institution which has the role to decide whether or not piercing the veil, is the court. The court exercises this competence by following different strategies which will be argued in this paper. Moreover, the whole process of deciding on piercing the corporate veil, is an interference from many actors within and outside the legal entity.

Categorization of Companies

The main law governing companies and their establishment in Albania, is Law 9901 of 14.04.2008 “On Entrepreneurs and Companies”, as amended. According to Company Law, the main classification regarding the legal form and the requirements of the law for companies is divided as Entrepreneurs, General Partnership, Limited Partnership, Limited Liability Company, and the Joint Stock Company. All of them are founded by one, two or more persons who agree with each other on having a financial objective through their basic capital or contributions defined by the Company Law, and are subject to the registration near the National Business Center in order to acquire legal personality. From the moment of the registration, the legal entity acquires civil rights and duties. The focus of this paper will be the Limited Liability Companies and the Joint Stock Companies as the two classifications which fall under the doctrine of “Piercing of the Corporate Veil”.

The main feature under Company law is that the establishment of a company leads to the separate legal personality of the legal entity from its shareholders. In other words, companies are considered as artificial persons that acquire the capacity to enter in contractual obligation in its own name, with its own property, to sue or to be sued as well and most importantly to possess a separate wealth from the wealth of the shareholders. This principle applies the same also in common law systems such as in the United Kingdom. One of the typical cases showing it, is the case of Salomon v. Salomon and Co, where the House of Lords in the English court of appeal held Mr. Salomon as personally liable toward his creditors and accepted the latter’s request on overlooking a separate personality of Mr. Salomon from that of his company where he was the major shareholder.

The Limited Liability Companies (LLC), is regulated by the Article 68 of Company Law. In a Limited Liability Company, the members do not bear any personal responsibility unless they have not paid up their contribution which constitutes the company’s basic capital that is not less  than 100 ALL.  The  second  type  of  company  stipulated  by  the  Law  9901  of  14.04.2008  “On Entrepreneurs and Companies”, as amended, is the Joint Stock Company (JSC) provided by Article 105 where it is stated that: “A Joint Stock Company is a company the basic capital of which is divided into shares and subscribed by founders…which are not liable for the company’s commitments and bear losses only to the extent of any unpaid parts of the shares.” 

These two types of companies are actually the affected forms regarding the applicability of piercing of the corporate veil due to the fact that the limited liability found in such categories, it is actually the scope of this doctrine which will be argued in the following part of the paper.

Understanding the Piercing of the Corporate Veil Doctrine

Piercing of the corporate veil is a common law doctrine which presents an exception from the general rule of the limited liability of the shareholders towards the creditors, by holding them accountable. Consequently, by piercing the veil, the shareholders would lose the benefits that the law grants in the cases of an LLC or at JSC where in general the only risk of these two types of organization is only failing to protect their investments in the company in case of bankruptcy proceedings. Whenever a company is unable to fulfill the creditor’s demand, the latter will find that it is in their best interest to obtain the payment from other parties such as the shareholders which are generally their target. Under such situation, creditors would pursue the judicial steps.

The court as the competent institution solving disputes of the parties is entitled to pierce the veil of the shareholders by taking in consideration different processes depending on the presented situation. In different states such as for example United States of America, the court might choose different attitudes regarding this issue. Ottolenghi describes in his journal one of the steps “Peeping behind the veil”, as a curios act of the court consisting only in getting information about the identity of the shareholders and their involvement in the company. The author continues with the second category of ‘lifting’ the veil named “Penetrating the veil”, which purpose is imposed upon the shareholder’s responsibility for the company’s acts. The third category “Extending the veil”, deals with the case when not one, but a group of legal entities conduct a common activity and the court does not refer to them separately but considers them as a single one. And the last group “Ignoring the Veil”, is the most extreme form of lifting the veil, where the courts ignore completely the corporate veil. The court having the discretionary power to decide whether a particular case falls under the circumstances of having the doctrine applied, might follow one of the steps above in accordance with the facts presented.

While discussing about this topic, a question that arises is what would be the reason of having and referring to this doctrine. Cheng. Thomas. K argues in his article regarding the objective of lifting the corporate veil and stating that compensation to the creditors is the most important reason why this doctrine is applicable. What the author intend to express is that if the company fails to comply with the terms of the contract established between the company and the creditors, then the latter has to be compensated for the damages caused to them. The second scope according to the author is to deter future improper conduct. This objective can be achieved only by imposing such a penalty that would be greater than any profit result of a misbehavior of the defendant. And the last purpose is to avoid any unjust enrichment of the shareholders. By this point it is meant that the court must have as a priority to follow actions of the shareholders in order to prevent any unjust profits that they can get.

After revealing some of the main objectives of the doctrine and the role of the court towards it, now the research paper will focus on the Albanian legal system regarding the piercing of the corporate veil doctrine.

Piercing of the Corporate Veil: An Albanian Point of View

The law 9901 of 14.04. 2008 on “Entrepreneurs and Companies” as amended, presented for the first time in our national legal system, the doctrine of ‘Piercing the Corporate Veil’ by incorporating it in Article 16 of the law. The law expresses also indirectly the existence of the doctrine in many other articles such as article 13/2 on “Conflict of interest and Related Persons” by stating that legal representatives must enter in contractual relationships only by the authorization of partners or members. Other articles have as their focus acting in good faith, avoiding any conflict that might arise in order to protect the company’s best interest. The law specifies the above principles in its article 14 on “Principles”, article 15 on “Right to information”, and article on “Prohibition of Competition” which the actors of a company must obey and follow. As per the main article 16 this principle states that, if the shareholders abuse with the privilege of the limited liability, then they will be held personally liable for all the obligations of the company. The law ensures also that this article can have as a subject not only the shareholders, but administrators, members of the supervisory body as well, if they exceed their competences and duties. This article presents what is also known as the ultra-vires-doctrine. The limited liability rather than a fundamental right is perceived as a privilege acknowledged by our law.

According to Article 16, the doctrine finds its applicability in the Albanian legal system under three possible grounds. The first case deals with the abuse of the legal form and / or the limited liability privilege offered by the company.  The term abuse intends to show that the element of fraud must exist and be proven in order to use the article 16/1 as a legal ground to sue someone.  In other words, the shareholders use their power willingly and knowingly in order to receive illegal profits from it. But this article is also applied to administrators or other bodies as well who might be held personally liable in case that they enter in unauthorized legal relationships with third parties with the target of the unjust enrichment.

The second possibility according to the law on Article 16 /2 is treating the company’s asset as if they were their own property. The commentary of the law provides the example when shareholders register their personal assets in the name of the company in order to benefit from any legal treatment such as any deduction from the taxes. This article strongly approaches the fact that third parties enter into contractual obligations only with the company as a juridical person and neither with its members nor with their properties. Subsequently, by not following this rule, it leaves ground for the application of the doctrine.

The last situation provided by Article 16/3 where, according to this paragraph “if shareholders or partners know or must have known that the company did not have sufficient capital to comply with its commitments toward the creditors and did not take necessary actions pursuant to the law to impede the company to continue its business and /or to assume new commitments toward third parties are held personally liable”. Many authors perceive this article as being too broad due to the words used such as ‘should have known’ and ‘sufficient capital’ which leaves the opportunity to the subjects for interpretation.

On the other hand, this article can find a correlated logic with the Albanian Law 110 of 27.10.2016 on “Bankruptcy”. According to the Article 14 of the law, the debtor has the obligation to file a request before the court for the opening of the bankruptcy procedure when it is provided that it is in an actual insolvency situation or that in a near future it will be in an insolvency situation. An actual insolvency situation deals with the existence of an outstanding obligation which the debtor has no possibility to pay it. Meanwhile a near future means that the law leaves to the debtor to value that for a particular period of time he would not be able to fulfill the obligation toward the creditors. Moreover, the law on its article 15 /1, clearly says that if the debtor does not present the request within the 60 days provided by the law, then it is held personally liable for all the caused loses.

This provision reinforces article 16/3 of the law 9901 of the 10.04 2008 “On Entrepreneurs and Companies” as amended, by stating that if the company (acting as the debtor) fails to start a bankruptcy procedure and impeding the continuity of the business due to insolvency reasons, the court can hold them personally liable for all the damages caused to the creditors. The existence of the laws expresses that the doctrine of piercing the corporate veil it is foreseeable in different situations in Albania as well. But it is only under the discretion of the court to decide whether to apply it based on the adequate provisions that the legal system offers.

Conclusion

This paper was focused on the doctrine of piercing the corporate veil. In order to show the aim of the doctrine, the research paper had the following structure. It started with the categorization of the companies stipulated by the law on “Entrepreneurs and Companies” by emphasizing two of the categories namely the Limited Liability Companies and the Joint Stock Companies. Since the shareholders of these two companies bear limited liability, if the latter exceed their rights, then the court has the discretion to pierce the corporate veil. According to some authors, the main objectives of this doctrine is to compensate the creditors, avoiding unjust enrichment of the shareholders and deterring future misconducts. In the Albanian legal system this concept was presented for the first time in the same law where it has stipulated three cases when this doctrine is applicable. Moreover, the article shows also that it is mandatory not only for the shareholders, but for the administrators and members of supervisory bodies as well in case of going beyond their duties. This research shows that the “Piercing of the Corporate Veil” principle, has been provided by the legislator in order to put a limitation to different actors of a company but especially shareholders. Also, this concept being part of our legal system tries to set boundaries for the good-functioning of the company law. In all the cases, the courts are the only competent institutions to check and decide on its applicability.

References

1. Aliaj, Erjola. 2014. “The Principle of shareholders’ limited liability and its exception in the Albanian company law.” European Scientific Journal 10, no.22 (August).
2. Bankruptcy Law 2016 s 2.

3. Burnazi, Ledja. 2016. “Corporate Fraud the Effectiveness of the Respective Provisions for Civil and Criminal Liability of Executives and Entities; An Overview of the Legal Framework of Albania, United States of America and Germany.” S. thesis, University of New York Tirana, Accessible in Library.
4. Cheng, Thomas K. 2010. “Form and Substance of the Doctrine of Piercing the Corporate Veil.” Mississippi Law Journal 80, (December).
5. Dine, Janet, and Michael Blecher. 2008. The Law on Entrepreneurs and Companies – text with 1st ed. GIZ
6. Entrepreneurs and Companies Law 2008.

7. Holland, T.B, Enkeleda Boci (Olldashi), and Hektor 2013. Commentary on Albanian Company Law. 2nd ed. Accessible at the Library of University of New York, Tirana.

8. Maccey, Jonnathan, and Mitts Joshua. 2014. “Finding Order in the Moras: The three real justifications for piercing the corporate ” Cornell Law Review 100, no.2 (November).
9. Malltezi, 2011. “E drejta Shqiptare e Shoqerive Tregtare”.1^st ed. Shtypshkronja: Mediaprint.

10. National Registration Center Law

11. Ottolenghi, 1990. “From Peeping Behind the Corporate Veil, to Ignoring it Completely” Modern Law Review 53, no.3 (May).
    

12. Salomon v. Salomon and Co Ltd., AC 22 (UKHL.1897).

 

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Doriana Qoli

Doriana is a law student, pursuing her studies at the University of New York Tirana. She is graduating this year in the Master of Science in Law. During her studies Doriana was engaged in various trainings and conferences with a focus in civil law, human rights and has also conducted different research papers in the same fields.

She is attracted to civil law, especially bankruptcy law, business law, intellectual property law and arbitration. She also finds  refugee law as part of human rights, a very interesting field where she presented and published as well in the official website of University of  New York Tirana a research paper  on “Internal displacement protection by the doctrine” (February 2019). The refugee law course and the research paper are co-founded by Erasmus and by European Union (Jean Monnet Module).