Establishing partners’ liability in limited liability companies

Introduction

Limited liability companies are governed by the Civil Code (10,406/2002) and may be supplementarily governed by the Corporations Law (6,404/76, as amended). The law requires that companies have a minimum of two members. If any of these is a foreign individual or entity, the member must be represented by a Brazilian resident.

Each party is liable for any act, omission, negligence, recklessness or malpractice that causes losses to other parties. Therefore, in order for a partner or manager to be held liable for any damages caused by their acts, it is essential to prove that:

    the omission or act happened as result of negligence or fraud;
    the damage actually occurred; and
    there is a causal relationship between the omission or act and the damage caused.

A few exceptions to this rule include:

    liability established by the Consumer Protection Code or environmental legislation (strict liability), both of which do not depend on the existence of fault; and
    piercing of the corporate veil (ie, disregard of the legal entity), as set forth in Article 50 of the Civil Code, which the courts have applied in certain situations.

Establishing liability

In a limited liability company, the liability of each partner is limited to the quota for which he or she has subscribed, but all partners will be jointly and severally liable until the social capital has been fully paid up. Once the capital has been paid up, liability is limited to the amount of each partner’s ownership interest (ie, the amount of their respective quotas).

However, there are exceptions to the general rule of limited liability. These include:

    partners’ decisions that violate the law or the articles of association;
    fraud against creditors; and
    misevaluation of an asset belonging to the social capital.

However, it is unlikely that a Brazilian creditor will take legal action against a foreign entity, due to the legal procedural difficulties (the need for letters rogatory) and costs involved.

Personal liability
According to Article 50 of the Civil Code, if a partner’s actions result in deviation from the company’s purpose or asset confusion, the judge may hold the partner liable, without limitation (ie, including his or her personal property), for the company’s obligations and debts.

A partner that votes on a decision that violates the law or the articles of association, or that conflicts with the company’s interests, will be liable without limitation for damages caused to the company, to other partners and to third parties.

Tax liability
In general, under Article 135(III) of the National Tax Code, partners are not liable for tax and social security debts of the limited liability companies. Instead, the article establishes that the directors, managers or representatives of a private legal entity are personally liable for credits related to tax and social security obligations arising from acts that exceed the powers granted by the company, or through violation of the law and of the articles of association. This provision will also apply to a partner who manages the company and abuses his or her powers. However, a number of important exceptions that provide for partners’ liabilities have been recognised in court decisions, relating to fraud or the irregular dissolution of a company.

Under Article 28 of the Consumer Protection Code, partners are liable for damages caused to end consumers when they:

    abuse their rights;
    act with excess power;
    act in violation of the law;
    act unlawfully; or
    violate the articles of association.

The judge may disregard the legal entity and, as an exception, oblige the partner to indemnify the end consumer.

Product liability
The liability established by the code does not depend on the existence of fault (strict liability). Furthermore, the code allows end consumers to demand compensation from any economic agent that has participated in the circulation of any product that caused an accident or is defective in quality or quantity, which may cause the product to be inappropriate or inadequate for use or diminish its value.

Employment liability
Regarding liability in the labour sphere, the Superior Labour Court has issued several decisions holding the partners jointly liable without limitation for the full payment of labour debts where the company’s capital is insufficient to cover such debts.

Liability following bankruptcy
In case of bankruptcy, the partners are jointly liable for the full payment of the social capital.