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Director and parent company liability

Liability

Under what circumstances can a director or parent company be held liable for a company’s insolvency?

As a rule, the Bankruptcy Law sets out that managers and parent companies of an insolvent limited liability company or corporation are not liable for the company’s debts and suffer no restrictions.

However, according to Section 82, the shareholders, controllers or directors of an insolvent company can be declared liable for the company’s debts in the event of wrongful or abusive conduct.

In addition, directors, controllers and parent companies may be held liable if the bankruptcy judge pierces the corporate veil, based on a disregard of the legal entity theory. In short, in cases of abusive use of corporate personality or fraud, the bankruptcy court may accept an incidental procedure to lift the veil of the corporate entity within the bankruptcy procedure.

Finally, other statutes in Brazil (eg, labour and employment laws) set out circumstances under which directors, shareholders and parent companies can be held liable regardless of whether such company is insolvent.

Defences

What defences are available to a liable director or parent company?

According to the Brazilian legal system, a person is presumed innocent until proven guilty. Hence, the burden of proof regarding fraudulent, wrongful or abusive conduct rests with the plaintiff attempting to extend the liability to the director or parent company.

Due diligence

What due diligence should be conducted to limit liability?

Comprehensive due diligence prior to an acquisition is advisable – especially regarding labour and tax-related liabilities. In addition, shareholders and directors should be well informed about the company’s activities and follow expert advice, especially in relation to compliance with the local legislation.

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