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September 6, 20220
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A commercial company is composed of bodies behind which stand individuals, who may enjoy privileges based on the company’s form of organization. For example, limited liability companies are the typical form of companies, whose partners are liable based on their contribution. 

However, there are situations known as ‘abuse with position’ when privileged persons may abuse their position to commit illegal acts in order to benefit economically from the desired consequences.

It is precisely in these cases that the court intervenes, by piercing the veil and removing privileges, in order to make the responsible persons fulfill their obligations. In legal terminology, this process is considered as ‘piercing the corporate veil’ – and constitutes one of the most important principles of law.

According to this principle, if the persons enjoying the privilege of limited liability provided by a company use it for unlawful purposes, or abuse it in a way that is detrimental to third parties, then the privilege loses its economic function, and those persons are personally held liable for their company obligations.

“Piercing the corporate veil” occurs in circumstances where courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts. Piercing the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders.

 

What are the cases of abuse of positions and legal form of a company? 

 

The individual who is a company member, shareholder, or representative of a member or shareholder, an Administrator or a member of the Board of Directors, that through actions or omissions secures unjust profits for him/herself, or wilfully causes to third parties a loss of property, is personally responsible towards third parties, including public bodies, to pay with his/her property for company obligations, when he/she: 

  1. abused of the legal form and/or limited liability privilege offered by the company; or
  2. treated one or more company assets as if they were his/her own assets; or 
  3. at a time when he/she knew or must have known that the company did not have sufficient capital to meet commitments as against third parties, did not take the necessary actions within his/her powers pursuant to the law, to impede, depending on the circumstances, the company to continue its business and/or to assume new commitments towards third parties, including public authorities; 
When are the above mentioned persons liable? 

 

Company members, shareholders, Administrators or members of Board of directors shall be personally liable towards third parties, including public authorities, only if their actions as described herein, has been ascertained by final court decision. 

They shall not be personally liable towards third parties, who, when the company became committed to them, were aware of these infringements, or could not in view of evident circumstances have been unaware of them. Any claim against these persons must be brought within 3 years from committing the infringement.

 

In which cases do courts pierce the corporate veil?

 

  • When no real separation exists between the company and its owners. If the owners fail to maintain a formal legal separation between their business and their personal financial affairs, a court could find that the corporation or Limited Liability Company (LLC) is really just a sham (the owners’ alter ego) and that the owners are personally operating the business as if the corporation or LLC didn’t exist. 
  • When a company’s actions were fraudulent/wrongful. If the owner recklessly borrowed and lost money, made business deals knowing the business couldn’t pay the invoices, or otherwise acted recklessly or dishonestly, a court could find financial fraud was perpetrated and that the limited liability protection shouldn’t apply.
  • When the company’s creditors suffered an unjust cost. If someone who did business with the company is left with unpaid bills or an unpaid court judgment and the above factors are present, a court will try to correct this unfairness by piercing the veil.

 

Legit Advices

 

Entrepreneurship is a thriving process. Actions that may seem unharmful and normal might affect relationships with internal collaborators and partners, undermine consumer confidence and risk unwanted court decisions.

To that end, Legit advises:

  • Inform yourself on the legal responsibilities
  • Draft written documents with partners, collaborators and third parties
  • Build trust and stick to your principles
  • Use platforms that make your daily activity easier

 

Platforms that make your daily activity easier

 

Legit platform, with a double functionality, enables fast legal services for everyone.

Legal documents:

 

 

Best of luck!

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