Piercing the Corporate Veil in Spagna

The doctrine of lifting the veil has no express recognition in the Spanish legislation (beyond being an extensive application of art. 7.2 of the Civil Code when it prohibits the abuse of rights and 7.1 where it is required the bona fides principle when exercising any right) and has therefore been subject to configuration through case law from Spanish Supreme Court, starting with the judgement dated May 28^th, 1984:

"... it has been prudentially decided, and according to cases and circumstances, to apply by way of equity and acceptance of the principle of good faith (article 7.1 of the Civil Code), (..... ) admitting the possibility that judges may penetrate ("lift the legal veil") into these legal persons when necessary to avoid abuse of this independence (article 7.2  of the Civil Code) to the detriment of others or of "the rights of others" (article ten of the Constitution) or against the interest of the partners, that is to say, of a misuse of their personality, in an "antisocial exercise" of their right (article seven, two, of the Civil Code). "

The doctrine is therefore recognized in the Spanish legal system, through the Supreme Court jurisprudence referring to situations where the Court decides to disregard the legal personality of a company and hold its shareholders personally liable for the company's debts or other legal obligations; in those situations, the Supreme Court looks beyond the formal structure of the company to hold individuals behind the company responsible for its actions.

Note: this technique allows to reach the shareholders but does not affect administrators who have their own liability regime.

There is no numerus clausus of cases in which the doctrine of the veil lifting is applicable, but it can be stated that the doctrine is applicable whenever it is intended to use the "corporate shield" and its limitation of liability for fraudulent purposes and to the detriment of the interests of third parties.

When these circumstances occur, this technique allows to "lift the protective veil" of the company by claiming liability from the ultimate beneficiary protected by the corporate shield.

Spanish case law, without being exhaustive, has been applying the technique in three groups of cases:

1. when the incorporation of a company is simulated in order to avoid the fulfilment of a contract,
2. when the legal entity is used to conceal an objective contrary to morality, and
3. when the legal person is used as an instrument of deviation or distortion in the application of legal rules.
   

Since 2000, the rulings of the Spanish Supreme Court have been forming a solid standard, although always with a restrictive application when there are no other ways to sanction abuses.

In the vast majority of cases, the application of the lifting of the veil doctrine by the Supreme Court is limited, above all, to cases of companies with only one partner, which is the one that typically lends itself to abuses in order to commit fraud against third parties (where the company is used to commit fraud or illegal activities, where the company is undercapitalized or has not respected the legal requirements for corporate governance, or where the company has been used to conceal the true identity of the individuals behind it).

What happens if the formalities are not complied with?

Compliance with the formal and disclosure requirements for the incorporation of companies is a necessary condition for the validity of the corporate contract in Spain. Failure to comply with these requirements can result in the nullity of the company's legal personality, which means that the company would not have the legal capacity to enter contracts, sue or be sued, or hold assets. However, the nullity of the company's legal personality is not automatic and must be declared by a court.

When a company is incorporated in Spain, there are certain legal requirements that must be met in order to establish the company's legal personality. These requirements include the execution and signature of a public deed before a notary, the approval of the company's bylaws, the appointment of directors and administrators, the justification of the disbursement of the social capital and the registration of the company with the relevant commercial registry. The failure to comply with these requirements may result in the nullity of the company's legal personality.

In order to declare a company, null and void, a plaintiff would need to file a lawsuit and provide evidence that the company failed to comply with the legal requirements for incorporation. Once a court has declared a company null and void, the legal consequences may include the liquidation of the company's assets and the personal liability of its shareholders and directors.

It is important to note that compliance with the formal and disclosure requirements is not a mere condition of regularity, but a condition of the existence and external effectiveness of the corporate contract. In other words, these requirements are not optional or negotiable, but rather an essential element of the legal framework governing the establishment and operation of companies in Spain.

In Spain, article 7.2 of the Civil Code establishes that "the law does not protect the abuse of rights or the antisocial exercise of the same". 

Within this generic prohibition of abuse is framed the prohibition of the abuse of the legal personality that has been developed through the doctrine of the lifting of the veil.

That is to say, 

a) The concept of abuse of rights in general is foreseen and prohibited in the Spanish legal system.

b) The specific case of abuse of legal personality is not expressly regulated.

c) It has been the Supreme Court who, through the doctrine of the veil lifting, has laid the foundations for the prosecution of the abuse of legal personality.

In the Spanish legal system, the concept of "abuse" of legal personality is used to describe situations where a company has been created or used for an improper purpose, such as to perpetrate a fraud or to evade legal obligations. The abuse of legal personality is considered to be a misuse of the legal privileges granted to companies and may result in the piercing of the corporate veil, where the court disregards the corporate form and holds the company's shareholders or directors personally liable for the company's debts or other legal obligations.

The concept of abuse of legal personality is closely linked to the principle of good faith. Under such principle, individuals and legal entities are expected to act in a manner that is honest, transparent, and fair. The abuse of legal personality is considered to be a violation of the principle of good faith, because it involves using the corporate form to gain an unfair advantage or to harm others. 

In the Spanish legal system, the abuse of legal personality can take many forms. For example, a company may be used to conceal the assets of its shareholders or directors, to perpetrate a fraud, to evade legal obligations, or to avoid paying taxes. The abuse of legal personality may also occur when a company is undercapitalized, meaning that it does not have enough funds to cover its debts or other obligations.

Yes, the principle of "corporate veil piercing" also exists in the Spanish legal system as a response to the abuse of legal personality. This allows the court to disregard the legal personality of a company and hold the individuals behind it liable for the company's obligations.

When a court determines that a company has been created or used for an improper purpose, it may pierce the corporate veil and hold the company's shareholders or directors personally liable for the company's debts or other legal obligations. In making this determination, the court will consider a variety of factors, such as whether the company was created for a legitimate business purpose, whether it has been properly capitalized, whether it has conducted its affairs in an honest and transparent manner, and whether it has complied with all legal requirements.

In the Spanish legal system, the concept of the "corporate shield" is recognized, but it is not an absolute protection for shareholders and directors of a company. This shield is based on the principle of the separate legal personality of the company, which means that a company is a distinct legal entity from its shareholders and directors. As a result, the liabilities of the company are generally limited to the assets of the company itself. 

However, there are situations where the corporate shield can be pierced, and the shareholders or directors can be held personally liable for the company's obligations. The Spanish legal system recognizes several exceptions to the corporate shield, which allow the court to disregard the separate legal personality of the company and hold the individuals behind the company personally liable.

One of the most common exceptions to the corporate shield is the doctrine of "abuse of legal personality", which we discussed earlier in response to question 3. This doctrine allows the court to disregard the separate legal personality of the company when it has been used for an improper purpose, such as to perpetrate a fraud, evade legal obligations, or conceal the assets of its shareholders or directors.

Another exception to the corporate shield is the doctrine of "alter ego", which is similar to the abuse of legal personality doctrine. This doctrine allows the court to pierce the corporate veil and hold the shareholders or directors personally liable for the company's obligations when they have used the company as a mere instrument to carry out their own personal business or financial affairs. The alter ego doctrine is often used when the company has been operated in such a way that there is no real separation between the company and its shareholders or directors.

A third exception to the corporate shield is the doctrine of "undercapitalization", which applies when a company is not properly capitalized or does not have sufficient funds to meet its obligations. In such cases, the court may hold the shareholders or directors personally liable for the company's debts, especially when they were aware of the undercapitalization and failed to take action to rectify the situation.

Yes, as mentioned above, there are cases in which the corporate shield does not protect the partners of an entity, and one of these cases would precisely be when the partners use the company to exempt themselves from personal debts or obligations, provided that such evasion is fraudulently intended to avoid the law.

It is perfectly legal for a partner to form a partnership in order not to be personally liable, but it would not be permissible for him to fraudulently try to exempt himself from personal liabilities or debts through his partnership.

When the offending partner is also a director of the company the partners and directors may bring actions for liability whereby the offending partner may be required to compensate the company for the damage caused and to repay any unjust enrichment he may have obtained.

When only a partner (who is not a Director of the company) is involved, the law provides the possibility of excluding this partner from the partnership. The grounds for exclusion of shareholders must be provided for in the company's articles of association and the removal of a shareholder requires a resolution of the general meeting.

En el sistema legal español, el principio que rige es el de limitación de la responsabilidad por lo que prima facie los accionistas no son responsables frente a terceros, incluyendo los acreedores, por las decisiones que adopten en sede de Junta de Accionistas o de Socios (según que sea SA o SRL). 

Por ejemplo, en situación extrema, si la Junta de Accionistas vota en favor de no pagar a un acreedor sin justa causa, los accionistas no serán individualmente responsables frente a ese acreedor; solo lo será la sociedad.

Eventualmente pudieran ser también responsables los administradores si hubieran actuado contra la ley, contra los estatutos o incumpliendo los deberes de su cargo interviniendo dolo o culpa.

Pero a los accionistas/socios solo puede alcanzarles la responsabilidad si se levante el velo y se justifica que el corporate shield era una estructura fraudulenta para causar daño o perjuicio a tercero.

Yes, under Spanish law, a de facto administrator is considered to be any person who exercises de facto the functions of such a position without having been formally appointed as administrator.

Art 236.3 of the Capital Companies Act defines the figure of the de facto director as follows:

"The liability of directors also extends to de facto directors. To this end, the de facto director shall be considered to be both the person who, in the real course of business, performs the functions of a director without a title, with a null or extinguished title, or with another title, and, where appropriate, the person under whose instructions the directors of the company act".

In order to impute liability to the de facto director of the company,  it must be accredited both the existence of the elements that configure this figure and the concurrence of the rest of the conditions for liability that are legally established. To be considered as such, the de facto administrator must: 

1. Carry out a management activity on matters proper to the administrator of the company;
2. This activity must have been carried out in a systematic and continuous manner, i.e. the exercise of management must have a quantitative and qualitative intensity; and
3. It must be provided independently, with autonomous decision-making power, and with the backing of the commercial company (SSTS of 4 December 2012, rec.1139/2010; of 22 July 2015, rec. 1701/2013 and of 8 April 2016, rec. 2535/2013).

Therefore, the liabilities that de facto directors may face may be those of a de jure director: 

Those persons who act as de facto directors must be liable, on the one hand, in cases of social and individual liability for damages as well as in those cases of liability for debts and, on the other hand, in cases of bankruptcy liability within the guilty classification of the insolvency proceedings, provided that in their actions the de facto administrators had intervened with the same powers and attributions as the de jure administrators.

It is important to bear in mind that the de facto director is liable not so much for his condition, but for the damage that, as a result of acts contrary to the law, the articles of association or those carried out without the diligence proper to de jure directors, he may cause to the company itself, to the shareholders or to third party creditors. This is why the imputation of liability to a person who is considered to be a de facto director requires us to accredit not only the appropriateness of such a classification of a specific person, but also the simultaneous concurrence of the rest of the premises of liability: damage, fault and causal relationship.

The following are the necessary requirements for assessing the liability of the de facto director:

• It must be established that the functions of the company directors have been transferred to someone who does not formally belong to the company's administrative body.
• This person must act autonomously and continuously, i.e. without submitting to the directives of those who formally hold the position, but on the contrary, substituting or controlling the latter.
• This displacement of decision-making power in the company in favour of the person who is considered to be a de facto director must have a fraudulent purpose, consisting of preventing the liability actions set out in the regulations from being brought against him.
• The production of damage or harm to the legitimate interests of the company, the shareholders or the creditors, as a result of the malicious or negligent actions of said director.
  

Yes, the notion of piercing the corporate veil has a much broader vocation and is applicable to both horizontal and vertical groups, and even to cases of corporate succession. What is decisive for these purposes is that a clear point of connection can be established between the companies in the group, regardless of whether this connection derives from a unitary administration and management or from the participation in their capital of the same common interests. 

To extend liability to one or more of the companies in the group and to whoever is behind all of them, it is necessary to justify and prove that there has been abusive or fraudulent behaviour:

• Confusion of assets (between the different companies, or between these and their partners);
• Confusion of identities or spheres (the companies, their directors or joint partners present themselves and act in the course of trade as if they were one and the same person, playing with their personalities as they see fit);
• Undercapitalisation of the company (either material, because the company is not provided with sufficient resources to carry out its activity, or nominal, because it is provided with resources, but not in accordance with the provisions of the LSC, but by means of successive loans in lieu of capital);
• The emptying of assets;
• External management of the company (frequent in vertical groups, where the subsidiary acts at the behest of the parent company, pursuing the interests of the latter);
• Other abuses of personality aimed at defrauding legitimate expectations of creditors and avoiding the fulfilment of obligations.