The golden rule and one of the basic principles\nwhen it comes to the issue of a capital company is that members i.e. founders\nof the company are not liable for the debts of the same. Therefore in such\ncompanies the capital (stake) determines the company and sets limits of\nliability of its members, where\nthe same will be liable only if the entire contracted stake is not entered or\npaid and then liability is up to the amount of unpaid (not-entered) stake.<\/p>\n\n\n\n
This principle is\none of preconditions that should serve as protection of founders i.e. it is\nso-called protective veil, but the same also has to protect the company from\nthe misuse by its owners. At a time in which transparency is one of the most\ncommon terms in the public sector, this golden rule gets another important\nmeaning. However, quite often are mentioned possibilities of misuse of this\nprinciple which, acting vice versa, can be used for circumvention of creditors\nand can lead to the lifting the veil, which represents a significant novelty.<\/p>\n\n\n\n
If assets of the\ncompany are being used for personal purposes and personal gain, along with a false\npresentation of the situation in terms of assets in company’s\nbusiness books and records, then the situation is called piercing the corporate\nveil. In practice this is quite often manifested in avoiding obligations, then it\nalso tricks and damages the creditors who are then being brought and held in fallacy, since it creates a false presentation and\nimage of the company i.e. it significantly hampers determination of the actual\nsituation with regard to the company and its assets.<\/p>\n\n\n\n
\nAll authorized persons of the\ncompany are responsible within the company in relation to all decisions, all\ndisposals of assets and also all contracts where all have to be made with a\npurpose of achieving the main goal of the company i.e. increase of the company’s property,\nso any violation of this principle presents piercing the corporate veil.<\/p>\n\n\n\n
Piercing the corporate veil would enable that, due\nto actions by which creditors are being damaged and the company misused, the owners\nwould be liable without any limits.\nHowever, it should be noted that the piercing the\ncorporate veil is also possible in cases of related companies in a way that the\nparent company can pierce the corporate veil of the subsidiary company, and\nthat in general there are various ways that can lead to piercing the corporate\nveil.<\/p>\n\n\n\n
\nAlthough this issue is more\nelaborated in Western countries (Eng. Lifting the veil – piercing the corporate\nveil), especially in the United States, the United Kingdom and Germany, where\nthere are judgments in such cases in which the court has ruled in favor of\npersons who were damaged in this way, this issue is also well known in our\nlegal practice, although did not yet find its place officially.<\/p>\n\n\n\n
\nThe Law on Companies of the\nRepublic of Srpska indeed provides that: Limited partners of a limited\npartnership, as well as members of limited liability companies and joint stock\ncompanies may be liable to third parties for obligations of the company if they\nmisuse the company for unlawful or deceptive purposes or if they dispose assets\nof the company as their own assets and act as the company as a legal entity\ndoes not exist at all.<\/p>\n\n\n\n
The\nresponsibility for these actions shall be determined by the competent Court, where\nthe same will take into account all relevant circumstances. However, this\nformulation in the law is not adequate to fully and properly address the issue\nof piercing the corporate veil nor the existing provisions are applied in\npractice.<\/p>\n\n\n\n
In neighboring\nSerbia and Croatia this issue is also receiving more attention as a result of\nrecent years, business practices and opportunities that have opened up with\nincreased participation of private capital. We are witnessing, unfortunately,\nincreased number of bankruptcies and companies that are unable to pay their\nobligations, As well as very common situation where the debt of the company is determined with a judgment, but there is no\nway of settlement of creditors simply because the company does not have any assets.\nWhat happens in these cases? Unfortunately quite often nothing happens. It is\nparticularly interesting that the issue of piercing the corporate veil is\nclosely related to cases of a limited liability company with only one member i.e.\nthe founder at the same time is also the director of the company and then misuse\nof the company gets its full meaning. The question that remains open is how to\nprevent such misuse and what would be the best protection mechanism. The\nCriminal Code of the Republic of Srpska lists a series of crimes against the\neconomy and payment system, and in this context worth of attention are particularly\nacts such as misuse of fraudulent bankruptcy, misuse of authority in economy,\nthen the business fraud. The sanctions provided for in the Criminal Code cannot\nprovide adequate protection in these cases. Namely, the law for legal entities\nprovides a fine, seizure of property and the dissolution of a legal entity.\nHowever, this method does not solve the fundamental problem – a legal entity\nshall be sanctioned, their property will be seized (if still available) and\nwill be determined the termination of that legal entity, but what will then\nhappened with damaged parties? Separation of\nassets of a legal entity from its owner \/ founder still protects those who have\nmisused the above mentioned principle for misconduct, especially in cases where\nthe offense does not include responsible persons and their actions or where the\nperson responsible in the legal entity is not considered as liable. In other\ncountries where this issue is much more elaborated, a crucial role is played by\nthe courts in deciding whether there has been a case of piercing the corporate\nveil following claims of those who have a legitimate interest. In these cases,\nif a court determines that there has been a case of piercing the corporate veil the court will remove the\n“veil” of separation and determine the responsibility of the founders\nof the company and eliminates the effect of the principle of separation of\ntheir property from the property of the\nlegal entity.<\/p>\n\n\n\n
If we follow the\nexample of the Law on Companies of the Republic of Serbia and the way it is\nregulated there, then the law should also define liable persons i.e. specify who\nmay act contrary to imperative legal provisions and thus suffer the\nconsequences of entering into the field of personal responsibility, as well as specify\ncases of misuse of companies and protection mechanisms.<\/p>\n\n\n\n
The effort to provide as much legal certainty and stability in the business and all economic flows is certainly reason to approach this issue seriously, with an aim of finding better and more practical solutions that would instill confidence to all participants.<\/p>\n\n\n\n
Author: Tijana Milacic<\/p>\n\n\n\n
E-mail: mtijana@afsajic.com
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