Can a creditor, for the purposes of enforcement against the debtor company, access the assets of the individual shareholders? Can the real estate owned by a family foundation be seized, or property owned by the foundation be utilised, against the founder's debts for the enforcement of tax debts of a founder? These and other questions arise in the context of the so-called "piercing of the corporate veil".
Piercing the corporate veil – What is it?
The term piercing the corporate veil is used for the disregarding of the principle of separation between a company and its shareholders. Piercing the corporate veil forms the limit to legal independence of legal persons and the possibility to deliberately disregard the separation between the legal and the controlling person. Figuratively speaking, the creditor reaches through the corporate veil of the company to the person behind it (in German "Durchgriff", in French "théorie / principe de la transparence").
Legal independence of the legal person vs. piercing the corporate veil
Basically, legal entities such as public limited companies, limited liability companies, foundations, associations, etc. are based on the complete legal and actual separation between the legal entity (company) and its members (shareholders). The legal entity is perceived as legally independent and participates independently of its members in legal relationships. As a matter of principle, only the legal entity itself is the bearer of rights and obligations. Thus, only the assets of the legal entity and not those of the individual members are liable for the liabilities of the legal entity. Even the owner of a one-person public limited company does not have to defend his personal assets against the liabilities of the company.
However, there are limits to the principle of legal independence if the reliance on the legal independence of the company and its exclusive liability are manifestly abusive and therefore unlawful. In such a case, the separation between the legal entity and the person controlling it must be reversed, or the person behind it reached (piercing the corporate veil).
What are the requirements for piercing the corporate veil?
On the one hand, according to the case law of the Federal Supreme Court, economic identity between the legal entity and its members is required. The company must be dependent on a person behind it, and that person must to be able to control the company. The economic interests of the company and the person controlling it must be the same, so that economic identity exists.
On the other hand, at the same time, claiming legal independence of the legal person must constitute an abuse of law and lead to the legitimate interests of third parties being obviously violated, for example by failing to fulfil a contract or by circumventing a legal provision.
What are the categories of piercing the corporate veil?
Doctrine and case law have divided certain constellations into categories. According to the so-called "sphere and asset merging", the independence of the legal person against the controlling person is not sufficiently considered, and there is a merging of the company and shareholders' assets. If the shareholder of a one-person company mixes his private assets with those of the company, e.g., if the company transacts private and business transactions through the same account, the bankruptcy of the company may allow the private individual's private property to be seized.
Another category is "undercapitalization", in which a company does not have sufficient financial resources or its asset base is withdrawn, so that its viability is jeopardized and creditors suffer defaults.
The third category is "instrumentalisation (external control)", according to which the controlling person, with the help of the company, pursues individual interests at the expense of company, thus exploiting the company and allowing external control.
What is the difference between "direct" and "reverse" piercing of the corporate veil?
In the case of "direct" piercing, the controlling shareholder is the target of piercing the corporate veil rather than the company. Conversely, if the assets of the company are used for the liabilities of the shareholder, such is called "reverse" piercing.
Piercing the corporate veil in debt enforcement
In the case of foreclosure law, the instrument of piercing the corporate veil is particularly necessary when a legal entity is used as an excuse, or misused, by its controlling shareholder in order to circumvent its legal or contractual obligations. Often, debt enforcement is not possible or problematic because the assets cannot be assigned to the respective debtor, but only to the person behind it. Therefore, if a final judgment against a debtor exists and he does not comply with the judgment, the debt enforcement comes into play.
If, however, the debtor has no assets available that could be realized or even seized, but a company controlled by him exists, then the assets of that company may be accessed (so-called reverse piercing of the corporate veil). It then has to be decided whether, to secure the enforcement, the corporate veil can be pierced to reach the person behind it. If so, a third party economically identical to the debtor, must tolerate that its assets could also be realized or – as security – seized.
Piercing the corporate veil can therefore be used as a means of enforcing a judgment under the above requirements, and allows recourse to the assets of a legal entity behind the debtor.
Piercing the corporate veil in an international context as a means of enforcement
Piercing the corporate veil provides an additional possibility for debt enforcement in Switzerland against debtors in countries where enforcement is difficult or impossible. In practice, difficulties often arise in enforcing a judgment at the debtor's seat, since enforcement of a foreign judgment is difficult or impossible in many countries. The possibility of piercing the corporate veil in Switzerland is therefore particularly relevant because many foreign – individual or legal – persons hold accounts with considerable assets in Switzerland and also use them for business purposes.