Andra Rubene and Māra Stabulniece on the liability of direct or indirect shareholders for the losses caused to a company or piercing of corporate veil doctrine in Latvia, “Jurista Vārds”

Andra Rubene and Māra Stabulniece on the liability of direct or indirect shareholders for the losses caused to a company or piercing of corporate veil doctrine in Latvia, “Jurista Vārds”

On 12 November 2013, in the journal “Jurista Vārds” article “Liability for losses of a dependent company” Andra Rubene, Partner and Head of M&A Practice Group in Latvia, and associate attorney at law Māra Stabulniece, both from law office TGS Baltic, have assessed the mechanisms included in the Commercial Law and the Group of Companies Law, which prescribe the liability of the governing undertaking (majority or former shareholder) for losses caused to the dependent company of the group and provide proposals for improvement of the normative regulations.

The Group of Companies Law contains the piercing of corporate veil provisions, which apply to limited liability companies (SIA or Ltd.) and joint stock companies (AS or JSC), and are very similar to the ones foreseen in the law on joint stock companies (AG or JSC) in Germany. Concurrently in practice Latvian minority or new shareholders, creditors that cannot gain satisfaction of their claims from the dependant company and insolvency administrators do not require liability of the governing undertaking for losses caused to the dependant company on the basis of the provisions of the Group of the Companies Law.

The possible reasons for not exercising those rights are lack of information about the provisions of the Group of Companies Law and possibilities of their application, difficulties to prove the necessary preconditions for establishing of liability and the fact that claims have to be recovered in favour of the dependent company and not in favour of the particular shareholders or creditors.

While the Commercial Law that is much more frequently used in practice currently does not contain the piercing of corporate veil norms, but only the norms with similar effect that are applicable only in special cases or only in relation to limited liability companies (SIA or Ltd.) and are not fully developed. The aforementioned thus encumbers the possibility to require the liability of the governing undertaking solely on the basis of the norms of the Commercial Law.

Thus it is necessary to incorporate the piercing of corporate veil provisions included in the Group of Companies Law in the Commercial Law, as well as supplement certain provisions of the Group of Companies Law accordingly. During this process it would be especially necessary to adjust the terminology and evaluate possibilities to ease standard of proof of preconditions for establishing of liability of the governing undertaking. This would ensure more frequent application of piercing of corporate veil norms in practice.

Click here to read the article (available in Latvian).