Court rules on piercing corporate veil of family-owned company

Luciana Bassani

Under Article 50 of the Civil Code, if the actions of one partner or manager cause a deviation from a company’s purpose or result in the commingling of assets caused by the abuse of a legal entity, the court may consider such partner or manager personally liable, without limitation, for the company’s obligations and debts (for further details please see "Piercing the corporate veil: new bill aims to prevent misuse of doctrine").

Recent decision

In a recent decision, the Superior Court of Justice pierced the corporate veil and found that it was impossible to exclude the liability of one of the partners of a family company (in which a mother and daughter each held 50% of the voting capital) if there was no evidence in the case proceedings to prove who effectively acted as the company’s manager.

The daughter had appealed asking to be excluded from the suit, claiming that she had not participated in company decisions. The daughter alleged that in rendering the partner that was not the manager of the company liable, the judgment rested on a broader interpretation of Article 50 of the Civil Code. Her allegations were supported by the management section of the company’s articles of association, which granted management powers solely to her mother.

An analysis of the case proceedings also demonstrates that:
 

• the decision was rendered within a motion to dismiss execution, involving matters that should be acknowledged ex officio, without the need for further evidence;
  
• the amount of the debt was negligible – a mere R2,500 (approximately $1,073); and
  
• the court considered that the fact that the company was not located at the address listed in the records of the competent trade board constituted abuse of its legal entity and an obstacle to the satisfaction of its creditor.
  

Nevertheless, the decision could represent a dangerous precedent for family-owned companies and Brazilian corporate law in general, if each future case is not carefully analysed on its own merits.

Comment

Limited liability companies are governed by the Civil Code and by the company’s articles of association, and may be supplementarily ruled by the Corporations Law (Law 6,404/76). Third parties should also abide by the rules established by the partners and disclosed by the competent trade board, as the articles of association are mandatorily registered.

Although the court had serious arguments for disregarding the company’s legal entity and holding the partners personally liable, the grounds for the decision also disregarded one of the main legal principles of corporate law. In most cases in Brazil, the burden of proving the alleged facts rests with the plaintiff (although, in order to contradict allegations, the defendant may present evidence). However, in the case at hand, the daughter will have the complex task of proving that she was not involved in company’s management (ie, providing negative evidence) and depositing the amount of the debt under the enforcement case proceedings.

The background of future cases will have to be analysed carefully in order to:
 

• avoid irreparable losses in cases where the debt is not negligible, taking into consideration the financial capacity of the individual that is being compelled to pay the debt of a legal entity;
  
• respect the provisions of the articles of association, which also rule the corporate matters of a company; and
  
• meet the conditions set forth in Article 50 of the Civil Code, in order to pierce the corporate veil and hold the individual effectively liable for abusing the company’s legal entity.