Piercing the corporate veil: new bill aims to prevent misuse of doctrine

As a general rule, the liability of each partner in a Brazilian limited liability corporate structure – whether a limited liability company or corporation – is limited to the quotas to which he or she has subscribed, or to the total amount of the issue price of the shares subscribed or purchased, as the case may be. However, there are exceptions to this general rule of limited liability. These include:

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

In addition to the legal remedies set forth under Brazilian law, piercing the corporate veil is used as an alternative to the general rule of limited liability. 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, the court may consider such partner or manager personally liable, without limitation (including personal property), for the company’s obligations and debts. Piercing of the corporate veil is also provided for in the Consumer Defence Code, the Environmental Law and the Antitrust Law.

Although the courts have widely applied this doctrine, it has not always been the proper and most effective measure for resolving disputes. Such erroneous application largely results from the introduction of a doctrine originating in common law into the Roman/Germanic-based Brazilian legal system.

As a result, some legal provisions allow for the corporate veil to be pierced on the mere insolvency of a legal entity. Furthermore, there is no specific lawsuit of a cognitive nature by which a harmed third party may seek to pierce the corporate veil of a legal entity and hold its partners and managers liable.

The Brazilian legal system already has alternatives for dispute resolution that are more appropriate and accurate than the above doctrine. For instance, Brazilian law already provides for managers’ and partners’ liability for acts performed in violation of law or the articles of incorporation (ie, ultra vires liability), in which case the partners and managers are held personally and directly accountable for the tort, by force of law.

The Brazilian legislature is in the process of introducing a bill that will provide greater clarity on piercing of the corporate veil. The new bill (3401/2008) aims to prevent misuse of the doctrine and safeguard certain principles recognised by the Constitution. The bill, which is under analysis by the House of Representatives, is intended to establish a specific judicial procedure for piercing the corporate veil in compliance with the constitutional rights of the due process of law and the full defence and adversarial system, which are often put aside. If approved in full, the bill is expected to play an important role in the Brazilian legal system.