Piercing the corporate veil
Ardjana Shehi
Kalo & Associates
Tirana
Albanian legislation was recently updated with the enactment of some important new Laws such as the Company Law, Tax Procedure Law and amendments to the existing Bankruptcy Law. The new developments in these Laws have also introduced the principle of piercing the corporate veil. This is a significant step in Albania and important to note, as one can no longer run a business relying on the principle of limited liability as a safety net.
Bankruptcy Law
According to the recent changes to the Bankruptcy Law (Law 9919 dated May 19 2008) where members or shareholders of a company, during the exercise of their duties, have been aware of the insolvency of the company and have failed to submit any request to the court for the initiation of bankruptcy procedures, for a period of three months starting from the date of knowledge of financial incapacity, they will be considered personally liable.
Will the members and directors only be liable for the damage caused to the creditors as a result of the delay? Or can this provision be interpreted to mean that the corporate veil is pierced?
In the latter interpretation, one may deduce that the mere failure to submit any request to the court for the opening of the bankruptcy procedure after the shareholder(s) became aware of the insolvency is not sufficient to cause the shareholder(s) to be subject to a piercing of the corporate veil. However, the criteria causing the shareholder(s) to be considered personally liable are not sufficiently clear. Also, this Law does not refer to the relevant provisions of the Company Law.
Company Law
Under the new Albanian Company Law (Law 9901 dated April 14 2008), one of the explicit exceptions from the principle of limited liability is the abuse of the legal form set out in Article 16 of the Law. Article 16(1)(a) refers to the act of "abuse", thus interpreting that it requires an element of fault (under Albanian law, fault includes gross negligence or wilful misconduct) on the part of the persons who act or fail to act as required, and therefore it is implied that this fault must be proved.
Strangely, there is no element of abuse present in the wording of Article 16(1)(b), and thus no link to the requirement of proving fault. Care should be taken not to apply or enforce this provision frivolously, and to ensure that it is read in light of the need for the existence of fault and the consequent harm to the interests of the creditors. The provision of Article 16(1)(c), also problematic, recognises the principle of a standard of duty of care in introducing such terms as "ought to have known", a lower threshold than the concept of abuse, and is short of the requirement of intent. This provision also mentions that the shareholders "should have acted" to ensure that the company had sufficient capital to fulfil the obligations towards third parties, thus placing a high standard of duty of care upon shareholders.
Tax Procedure Law
The principle of exceptional liability of shareholders is also recognised by Article 99 of the new Tax Procedure Law (Law 9920 dated May 19 2008). This Law expressly provides that after the sale of a seized property and when the tax liabilities of the legal person are not fully paid, liability for the remaining tax will be transferred to the shareholder(s) responsible in conformity with Article 16 of the Company Law. Furthermore, this Law states that the director and shareholder(s) are jointly liable for the unpaid tax liabilities of the legal person. It also stipulates that the same rules apply when there are unpaid tax liabilities at the completion of the process of liquidation or bankruptcy of the company.
Having considered the above, it is clear that the principle of piercing the corporate veil is now recognised by Albanian legislation. What needs to be elaborated is: who is subject to this piercing and what is the role of the Albanian courts in the interpretation and implementation of this principle in practice?
Article 16(1) of the Company Law speaks of "members and shareholders... who act or fail to perform required actions". The new Tax Procedures Law provides that "... administrators, quota-holder(s) or shareholder(s) are jointly liable for the unpaid tax liabilities...". However, it remains unclear what the term "fail to perform required actions" means, given that the Company Law does not seem to provide for any specific required actions on the part of members or shareholders aside from the general duties deriving from being a member or shareholder.
It is crucial for the court to play a fundamental role in the implementation of exceptional liability of shareholder(s), especially as the Company Law does not clearly formulate the rule with consistent reference to "abuse". Furthermore, these new amendments do not expressly require a causative link between the acts of the persons referred to in the provisions mentioned above and the consequences and the extent of their liability. The role of the court is also important because this principle can be implemented only in cases where the court decides on the fault of the shareholder or member, and in the declaration of the insolvency of the company due to the abuse of the limitation of liabilities principle. The legal amendments mentioned above have not taken into consideration these important elements, thus risking the failure of the legislative guarantees offered even in the case that the business activity fails.
Is this principle constructed according to standards and true intention? Will the courts apply the narrowest interpretation of the provisions related to piercing the corporate veil as anticipated by the doctrine? One may conclude at present that while the introduction of this principle is a very positive move, there remains a high risk of its misapplication.