From time to time, the question arises as to whether shareholders or other representatives of a company can pursue litigation by creating a company specifically for such purposes and, in the event of loss, avoid personal liability for the litigation costs. Swedish legislation explicitly states that shareholders of limited liability companies will not bear the costs of the company's obligations – a concept which is achieved by balancing a provision of shareholders' personal liability with a liquidation obligation due to capital deficiency. Further, the principal rule under the Swedish procedural code is that the losing party to a dispute is liable to cover the other party's litigation costs.
The ability of a company's shareholders or representatives to seemingly dodge responsibility is seen by some as contrary to law and such situations have been surrounded by uncertainty. Discussions on this matter suggest that company representatives may be held liable as they are protected by the non-codified principle of piercing the veil. In a 2014 decision, the Supreme Court employed this principle and hence clarified certain areas of uncertainty.
A group of companies was required to pay significant additional taxes and was eventually declared bankrupt. The bankrupt's estate sued the auditing firm responsible for providing tax advice. Shortly after the companies' bankruptcy, two persons with ownership interests in the companies acquired another company (the litigation company), which in turn acquired the subject matter of the dispute.
The lower court rejected the litigation company's claims and ordered it to reimburse the auditing firm's litigation costs. Shortly after, the litigation company was declared bankrupt. The auditing firm received no dividend from the bankrupt's estate for its litigation costs and subsequently claimed that the litigation company's shareholders were jointly and severally liable under the principle of piercing the corporate veil. The verdict was appealed to the court of appeal, which confirmed the lower court's ruling.
The Supreme Court reviewed the case and found the litigation company's representatives jointly and severally liable for the auditing firm's litigation costs. The court found that the company's sole purpose had seemingly been to conduct litigation concerning the acquired debt, thereby limiting the negative consequences for itself in the event of an unsuccessful outcome or, conversely, reaping the economic advantages of a successful outcome.
The Supreme Court's decision provides a number of takeaways with regard to the principle of piercing the corporate veil.
First, the timing of the litigation company's establishment and the acquisition of the dispute's subject matter is interesting – the litigation company being established a few months prior. Second, the activities and transactions conducted by the litigation company were also important. Basically, the company conducted no other activities and transactions apart from pursuing litigation. Also of note were the financial means (other than the necessary share capital) provided by the shareholders to the litigation company at its inception, as these covered only its own litigation costs. Further, there were no indications of a plan to cover the costs of a potential loss in court. The Supreme Court also highlighted that creditors which can be considered involuntary hold a special position.
Hence, the ruling conveys how the Supreme Court balances the statutory obligation to cover the costs of litigation with the rules limiting shareholder liability with regard to their company's obligations by applying the principle of piercing the corporate veil. The decision has clarified that pursuing litigation through a specific litigation company does not relieve shareholders from being jointly and severally liable for litigation costs.