Piercing the Corporate Veil

Bill No. 3,401, of 24 April, 2008, the fruit of the work of a study group reviewing the Capital Market masterplan, seeks to regulate decisions to lift the corporate veil by instituting specific legal procedure.

Many judges have, in the past, ordered the lifting of the corporate veil, such decisions being ratified by law with article 50 of the new Brazilian Civil Code of 2002. This provision establishes that corporate debt may be settled using the assets of partners and managers in cases of abuse of the legal entity, characterized by deviation of purpose or commingling of assets; however, the mere insolvency of the legal entity is not sufficient grounds for piercing the corporate veil. Such measure must be taken in relation to a particular situation and must identify specific company debts, partners and managers.

Deviation of purpose occurs when the truth is distorted to use a company for purposes other than those for which it was established, causing harm to a third party for the benefit of oneself or another. Commingling of assets occurs when funds are misused, whereby a partner uses company resources to pay personal debts. Mismanagement itself is not grounds for piercing the corporate veil, as mistakes may occur in the course of managing a company.

This issue is important because an increasing number of courts is ordering the piercing of the corporate veil, without discernment and observation of the legal requirements, thus affecting everything and everyone. The exception has become the rule, defying the limited liability principle and corporate autonomy, which for centuries have enabled and fostered business activity.

The electronic blocking of checking accounts by court order is performed via the Bacen-Jud system (Brazilian Central Bank system), which depends on electronic collaboration between Brazil’s courts and banks. However, piercing the corporate veil is undermined by the lack of procedures for its appropriate application, because, in many cases, those who are not actually responsible are obliged to pay off debts in order to unblock an account.

On the other hand, the lack of legal security has led many to obtain insurance to offset the legal risks of manager of being unjustly held liable for corporate debt, thereby laying a heavy burden on Brazilian companies.

In this context, the aforementioned Bill seeks to set clear procedural rules for court acts and decisions, in order to reduce the unchecked application of the principle by requiring the objective indication of the acts that are the cause for holding the party liable. In addition, the Bill will require prior exercise of the right to reply and of full defense, in a specific proceeding in which the judge may not voluntarily lift the veil and the partners may submit evidence.

Furthermore, the Bill stipulates that this measure may only be taken in cases explicitly covered by the law, so that the nonexistence or insufficiency of assets to cover a company’s debt does not constitute grounds. Additionally, only the parties who committed the abusive act on the company’s behalf in detriment to its creditors and for their own benefit will be held accountable, and the company will be given the opportunity to pay the debt beforehand.

The legislators are called upon to pass this proposed legislation, although it will be worth little if the presumption of the abuse of the legal identity persists, using the lifting principle as a means to "ensure justice". The latter cannot be given at whatever cost, by breaking corporate autonomy and holding those who did not cause the damage or those whose stake in the company is minute, and therefore had no control, liable for the resulting debts, without concrete evidence that a fraudulent act was committed. It is crucial that only the company’s social and assets should protect third parties that have been harmed, apart from certain exceptions, under threat of rendering the principle of corporate identity ineffective.