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13 October 2020
As with most legal systems, Luxembourg law recognises a principle of separate corporate personality, according to which a company is a legal person on its own, with an existence, rights, obligations, assets and liabilities that are separate from those of its shareholders and subsidiaries.
According to this principle, a company's shareholders and subsidiaries are protected by a 'corporate veil', which prevents them from being held liable for the company's actions and does not allow the company's creditors to reach the assets of its shareholders or subsidiaries.
The corporate veil allows economic actors to organise their business affairs in order to properly segregate and compartmentalise their potential liabilities and is thus of fundamental importance not only for corporate law, but also for the business world at large.
Hence, piercing the corporate veil and allowing a company's creditors to hold its shareholders or subsidiaries liable for the company's actions, as if they were their own, and to reach their personal assets is traditionally possible only under limited and exceptional circumstances.
Luxembourg legislation explicitly allows for the piercing of the corporate veil only in the specific context of bankruptcy proceedings for the benefit of the bankrupt company's creditors:
Besides the abovementioned legal bases, which apply only in the specific framework of a company's bankruptcy, Luxembourg case law also allows the corporate veil to be pierced in certain situations where the company in question would be qualified as fictitious.
Traditionally, case law would consider a company 'fictitious' in one of the following circumstances:
On 15 May 2019 the Luxembourg District Court went beyond this traditional concept by allowing for the corporate veil to be pierced without examining whether the concerned companies could qualify as fictitious. Instead, the court based its decision on the grounds that the concerned companies had helped their shareholders to commit the wrongful actions that had generated the creditor's claim.(1)
In the case brought before the Luxembourg District Court, the claimant already held a judgment rendered a few years earlier by a Czech court that ordered the defendants to pay him certain amounts on the grounds of misappropriations of corporate assets and fraud.
To enforce the Czech judgment in Luxembourg, the claimant initiated third-party attachment proceedings, which allow a creditor to attach assets of their debtor in the hands of a third party, such as a bank, and then have the assets transferred to the creditor, provided that the attachment is validated by a Luxembourg court – which was precisely what the Luxembourg District Court was asked to do in this case.
The claimant had attached assets that belonged not only to the defendants themselves, but also to two companies of which the defendants were shareholders.
The claimant argued that the attachment of the two companies' assets was justified by the fact that the companies had been created and used by the defendants for the sole purpose of allowing the latter to commit the misappropriations of corporate assets and fraud that were the basis of the Czech court's judgment.
The defendants argued that the companies were third parties, as only the defendants themselves (and not the companies) had been condemned by the Czech court, and that the companies' assets could therefore not be attached based on the judgment.
The Luxembourg District Court ruled in the claimant's favour, declaring the attachment of the two companies' assets to be valid.
The court held that a third party's assets could be attached not only in case of pretence or intermingling (ie, when a company qualifies as fictitious), but also if a third party has acted in a way for which it could be held liable (in which case their actions would justify the piercing of the corporate veil).
The court noted that based on the Czech judgment, the defendants' wrongful actions (misappropriations of corporate assets and frauds) had been committed through the two concerned companies, which had played an active role in their wrongdoing.
This judgment can be seen as confirmation that the case law on piercing the corporate veil has evolved, as the Court of Appeal already rendered a similar decision on 16 October 2014. Thus, this trend follows the opinion expressed by part of the legal doctrine that a wrongful action committed by a company should allow for the piercing of the corporate veil in the context of third-party attachment proceedings.
Therefore, apart from in the specific context of a company's bankruptcy, the often-difficult task of proving that a company is fictitious is no longer the only possible way in which to thwart a debtor's fraudulent manoeuvres. This judgment proves that a company's wrongdoing can be a sufficient ground for piercing its corporate veil – a ground which will certainly be used by litigators.
For further information on this topic please contact Mathieu Laurent or Raphaël Schindler at Luther SA by telephone (+352 27484 1) or email (email@example.com or firstname.lastname@example.org). The Luther SA website can be accessed at www.luther-lawfirm.lu.
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