One of the most debated topics in corporate law is that of understanding where the boundary lies between justice and shareholder limited liability. Although contrasting with corporate creditors’ interests, the shareholder’s right to enjoy limited liability is the cornerstone of the economic and social development of a country. It is for this reason that countries all over the world recognize limited liability as a general principle of law that commands respect worldwide and requires safeguarding in the name of progress.
However, the generality of the concept of limited liability inevitably leads to concerns of it being abused. For example, think of shareholders that misuse limited liability to cheat in pursuit of their own personal interests.
In this case, the arising question is: can shareholders still enjoy limited liability when they abuse their rights and powers? Attempts at answering this question often fall to the theory known as “piercing the corporate veil”, which gives an indication as to when judges should disregard shareholder’s limited liability.
Some of the veil piercing theories try to address the issue of shareholders’ abuse of their rights simply by interpreting the statutory definition of limited liability. In this regard, it is relevant to mention the German doctrine of commingled assets(Vermögensvermischung). According to this doctrine, shareholders should not enjoy the privilege of limited liability on the basis that commingled assets would show their willingness to disregard the principle (included in the legal definition of limited liability corporation) of the separation of identities between them and the corporation, laid down in § 13 (2) GmbHG (German Limited Liability Companies Act). This reasoning has been upheld by the German Federal Court of Justice. However, it must be stressed that the issue of commingling of assets arises when shareholders and corporate assets can no longer be divided.
In Italy— among the many doctrines so far formulated—an innovative theory of the so-called manager shareholder (socio gestore) was formulated through the interpretation of Article 2476 (7) of the Italian Civil Code. According to this provision, shareholders are jointly liable with directors if they act in a way that is harmful towards the company as well as other shareholders and/or creditors. Therefore, according to this approach, shareholders are considered liable when they manipulate directors to pursue their own interest and at the same time, improperly damage creditors’ interests. Shareholders are thus considered liable when two elements are present, namely: (1) the shareholder’s intention to decide or authorize directors to accomplish harmful acts for the company, and (2) the existence of creditors’ detriment .
In the Chinese system, one of the most applied legal rules is Article 20 (3) of the Company Law of the People’s Republic of China. According to this provision, a shareholder shall bear several and joint liability for the debts of the company if he “evades the payment of its debts by abusing the independent status of legal person or the shareholder’s limited liabilities” and, at the same time “seriously injures the interests of any creditor.”
UK jurisprudence developed a much more restrictive approach. In the case of Prest v Petrodel Resources Ltd, veil piercing was outlined through the distinction between two concepts, namely concealment and evasion. While concealment arises when a subject interposes a company to conceal his real identity, evasion occurs when there is a legal right against a subject and the company is interposed in order to “defeat this right or frustrate its enforcement.” According to the said judgement, veil piercing can be implemented only if evasion is recognized.
In American jurisprudence, veil piercing was often justified because of “personalities confusion.” More specifically, according to the alter ego doctrine, the disregard of limited liability is allowed when one or more shareholders—through their powers of domination and control of the company—confuse their own personal assets and their interests with those of the company to the point that the interest and ownership of shareholders and corporation can be considered the same, and thus their personalities are no longer separate. However, a further theory has since been developed and other preconditions are now required. Namely, according to the instrumentality doctrine, as well as domination, control and confusion—in order to disregard the limited liability—the defendants shall prove how the shareholder’s conduct is able to create an “inequitable result” or that “circumstances must be such that adherence to the fiction of separate corporate existence would sanction a fraud or promote injustice.”
Reworking Veil Piercing
Protecting the principle of limited liability is beneficial for a country’s social and economic development but, at same time, limited liability might contrast with principles of fairness and justice. Therefore, the veil piercing conundrum seems to be characterized by two different interests that are in contrast with each other. These are respectively:
- the interest to assure justice—ensured by allowing the piercing of the veil of limited liability in the presence of unfair conduct; and
- the interest in the economic and social development—ensured by respecting the principle of limited liability.
Which of the two interests is more beneficial for society as a whole? In this regard, it is believed that justice for company creditors cannot be sacrificed in the name of economic and social development. This conclusion stems from the fact that if judges do not guarantee justice for creditors, not only would fundamental principles be compromised, but even market players (in our case the creditors) would be discouraged from contributing to the well-functioning of the market as a whole. Therefore, there is an interest to ensure justice to some extent, even as a precondition for economic and social development. Accordingly, it is suggested that the legislator or the jurisprudence should strive to make the former interest (justice) prevail over the latter (economic and social development).
Based on this assumption, we should ask ourselves how a legislator or a judge could guarantee justice in this case, avoiding any kind of injustice perpetrated by shareholders towards the creditors. To achieve this goal, the best approach is to provide a firm and clear definition of abuse of limited liability. Therefore, my paper attempts to propose two definitions: a general definition of abuse as “a deviation from the purpose of the law” and a more specific definition of abuse as “a way to deceive creditors.”
According to the latter definition, the abuse of limited liability is: “an unpredictable action of the shareholders that created—even if unintentionally—a false perception in creditors when assessing their investment risk.” In other words, an abuse of limited liability such as to justify veil piercing arises when shareholders make false representations, e.g., cheat or mislead company’s creditors by providing fake or misleading information.
Indeed, the transparency of such information is a precondition for creditors to evaluate their investment risks, which in turn is an essential pre-requisite for the proper functioning of the market—in accordance with economic and social development as well as with a sense of justice. This would ensure that progress can still be made by allowing veil piercing in the interest of creditors within the limits of a firm concept of limited liability, creating a carefully considered balance.
Andrea Sebastiani is an Associate at Chiomenti Law Firm
This post is adapted from his paper, “Limited Liability and Justice: When Should We Pierce the Corporate Veil?” available on SSRN.
 Tan Cheng, Han Wang, Jiangyu Christian Hofmann, Piercing the Corporate Veil: Historical, Theoretical and Comparative Perspectives, 25 NUS Law Working Paper (2018), https://law.nus.edu.sg/publications/piercing-the-corporate-veil-historical-theoretical-and-comparative-perspectives-2/.
 Holzmiller, Responsabilità del “socio gestore”, at 77–81; Sangiovanni, La responsabilità del socio di s.r.l., at 531–538.
 Prest v Petrodel Resources Ltd  UKSC 34,  2 AC 415.
 Walkovszky v. Carlton, 18 N.Y.2d 414, 223 N.E.2d 6 (1966).
 Van Dorn Co. v. Future Chem. & Oil Corp., 753 F.2d 565, 570 (7th Cir. 1985).