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News

 

 

What is the concept of “Piercing the Corporate Veil”?

Companies are viewed as independent legal entities and as such, they have certain
rights/obligations and can be held liable for wrongful acts. They exist in part to shield the
personal assets of shareholders from personal liability for the debts or actions of the company.
This is often regarded as a major benefit for the reason it shields those behind the business from
the personal liability in the event of misdeeds.
The international practice in states such as the UK, Germany and the United States, with
respect to the application of the concept of the ‘corporate veil piercing’ has been stably
employed through the combination of the available regulations and rapidly up-warding judicial
practice. In number of precedential decisions of international courts, the disregard of the
corporate veil was used to uncover the fraudulent and inequitable actions of corporations to
avoid compensating their tort obligations, tax liabilities as well as any other liability that is
imposed on them by the law. Despite the fact the ‘limited liability’ rule regulated the separation
of liabilities between the shareholders and the company, the legal developments in the corporate
law required evasion of the rule in some exceptional cases such as the ones specified above.

 

Armenian Regulations re the application of the Corporate Veil Piercing

In this respect, Article 60 of the RA Civil Code stipulates that
“1. A legal person shall be liable for its obligations with all property belonging to it.
2. The founder of (or a participant in) a legal person shall not be liable for the obligations of the
legal person, and the legal person shall not be liable for the obligations of the founder (or
participant), with the exception of cases provided by the present Code or by the charter of the
legal person.”

This implies that the shareholders of the company and the company itself shall have
separate personalities. 1 On this note, it is worthwhile mentioning that the Law on JSCs 2
alternatively states that “if the reason for Company insolvency (bankruptcy) is the activities
(inaction) of shareholders or other persons that have either the right to give compelling
instructions to the Company or an opportunity to determine the activities of the Company in
advance, then these shareholders or other persons may be exposed to additional/subsidiary
liability for the Company’s obligations in an amount that cannot be covered sufficiently by the
Company’s property.”
The legislator’s intention is to provide personal liability of the shareholders and/or other
persons (who have the right to instruct the company in decision making process) if their
actions/inaction resulted in the insolvency or bankruptcy. The provision also adds that the
personal liability of the shareholders and other persons towards the claims of the potential
creditors extends to the degree of the value that has not been satisfied by the company assets.
Moreover, RA Law on Bankruptcy 3 regulates certain relations where those shareholders
or any affiliated persons of the company who attempt to intentionally predetermine the
bankruptcy of the companies, may bear personal liability towards the part of the claim that is
unsatisfied by the company assets. These regulations safeguard the rights of the creditors who
may be the victims of corporate misdeeds when intentional bankruptcy is predetermined by the
binding decisions of shareholders or any other affiliated persons.
In case the Administrator of the bankruptcy finds that there are reasonable doubts that the
company was intentionally bankrupted, then the persons having such decision-making powers
may become participants of both bankruptcy and/or criminal 4 proceedings. ”
The doctrine of piercing the corporate veil is mostly shrouded in misperception and
confusion due to the fact that the Armenian courts understand the corporate form is supposed to
be a legal entity with the feature of legal “personhood.” On the other hand, Armenian legislation
“recognizes” 5 that it is perfectly legitimate to establish a company or other form of limited
liability company business organization such as an LLC for the very purpose of escaping
personal liability for the debts incurred by the entity.


1 The same statement can be made when looking at the relevant provisions of the Laws on limited liability
companies and Joint stock companies.
2 Clause 3, Article 3 of the RA Law on Joint Stock Companies.
3 Article 8 of the RA Law on Bankruptcy
4 Article 159 of the Criminal Code of RA, “intentional creation of insolvency features by the founders (participants)
of the debtor company or by other persons who had the opportunity to give compulsory instructions or to
predetermine its decisions / … / which caused large damage [Specify what is large] to the debtor or the creditors: is
punished by imprisonment for the term of from two to six years, with deprivation of the right to hold certain public
positions or engage in certain activities for up to three years.
5 Recognition of the corporate-veil is also present under Article 75 of the RA Civil Code which regulates the
relations between parent and daughter (subsidiary) companies and certain criteria needs to be met for such
application by the courts.

 

 

Author: Maykl Hovhannesyan / Associate


Disclaimer:

This material is produced by Legelata LLC. The material contained in this newsletter is provided for general information purposes only and does not contain a comprehensive analysis of each item described. Before taking (or not taking) any action, readers should seek professional advice specific to their situation. No liability is accepted for acts or omissions taken in reliance upon the contents of this material.

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