Both the Limited Liability Company Act and the Stock Corporations Act state that shareholders are not liable for the liabilities of the company, thus clearly establishing the corporate veil concept. However, despite these statutory provisions, Supreme Court precedents have acknowledged the concept of piercing the corporate veil in principle.
As of July 1 2013, the Insolvency Act has been amended to provide for an obligation on majority shareholders of insolvent (ie, illiquid or over-indebted) Austrian or foreign capital companies to file for insolvency if the company no longer has at least one managing director. Non-compliance will result in the direct liability of the majority shareholder towards the company's creditors.
In practice, when holding shareholders liable for obligations of their company, courts do not rely on the concept of piercing the corporate veil; instead, shareholders are usually held liable based on tortious conduct or a separate contractual commitment. For example, shareholders were held liable in cases where they prevented legal representatives of an insolvent company from filing for insolvency.
This relates to the concept of the liability of a de facto managing director. Under this doctrine, courts will apply the fiduciary duties generally applicable only to managing directors or management board members to a shareholder in situations where the shareholder acts as managing director or takes a decisive influence on the operations of the company, thus effectively replacing the managing director.
The concept of piercing the corporate veil exceeds the above-mentioned tortious or contractual liability and aims at a teleological reduction of the limited liability concept. In the absence of any statutory basis, legal scholars and courts have developed several applications for piercing the corporate veil, whereby details and scope often remain opaque. In general, piercing the corporate veil is accepted in the following circumstances:
- qualified undercapitalisation;
- the commingling of assets;
- abuse of the corporate form; or
- destruction of the company's economic basis.
The most practically relevant applications are qualified undercapitalisation and commingling of assets, and the threshold for both is high. According to the Supreme Court, a company is deemed to suffer from qualified undercapitalisation if it has obviously insufficient equity resources, such that a failure of the company to the detriment of its creditors can be expected in the ordinary course of business with a likelihood clearly exceeding the normal business risk. Qualified undercapitalisation must exist initially. Commingling of assets occurs where the company's assets cannot be distinguished from the shareholder's private assets, due to inadequate bookkeeping or other conduct suitable for concealing.
The amendment to the Insolvency Act introduces a statutory basis for piercing the corporate veil. In the absence of managing directors or management board members, the majority shareholder of an insolvent company must file for insolvency within 60 days of the date on which the company became illiquid or over-indebted, if the following conditions are met:
- The shareholder holds more than 50% of the company's registered share capital; and
- The company no longer has at least one managing director, including cases where the appointed managing director is not acting as such (because the managing director is either unable or unwilling to act).
In case of non-compliance, a majority shareholder will become liable to the company's creditors for any losses caused by such non-compliance.
The amendment can be seen as a supplement to the reduction of the minimum registered share capital required for the incorporation of an Austrian limited liability company from €35,000 to €10,000. The legislature seemingly wishes to counter arguments that the reform and (slight) liberalisation of the limited liability company has been carried out at the expense of creditors. Therefore, the new legislation imposes a direct liability on majority shareholders towards the company's creditors. The Austrian liability concept is stricter than that under the German parallel provision; shareholders in Austria become liable irrespective of any actual knowledge of the company's insolvency or the absence of managing directors. While previously the liability of shareholders always required active conduct by the shareholder, the new liability concept subjects majority shareholders to liability where they have failed to act. Such direct liability of shareholders towards creditors has thus far not been part of the limited liability concept under Austrian law.
In order to avoid liability under the new statutory concept of piercing the corporate veil, majority shareholders of both Austrian and foreign limited liability companies and stock corporations must monitor the financial and the management situation of their companies. This is in particular advisable for foreign shareholders of Austrian holding companies that are usually not concerned with the daily affairs of their companies.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.