Piercing the Corporate Veil in Brasil

To prevent members of a legal entity from fraudulently abusing the corporate shield, the Brazilian legal system allows for the piercing of the corporate veil under certain circumstances. This exceptional measure depends on providing evidence of either a deviation from the intended purpose of the legal entity or the commingling of assets.

There are other situations where corporate protection can also be disregarded. In a scenario where a consumer is having difficulty receiving compensation from a supplier of goods or services, corporate protection can be disregarded even without evidence of fraud. The  corporate veil can also be disregarded in favour of an employee who is bringing legal action against their employer.

The law also includes situations where corporate protection can be disregarded, such as antitrust abuse and environmental damage.

What happens if the formalities are not complied with?

The company is considered a legal entity upon the registration of its articles of incorporation or bylaws before the relevant authorities. Once admitted for registration, the company is existent, and the shareholders are under the corporate shield.

The concept of abuse of legal personality is defined in the Brazilian legal system as the misuse of limited liability through the commingling of assets and/or the deviation of the purpose of the legal personality.

In order to configure the deviation of purpose, it should be proven that the legal personality was used for the purpose of harming creditors and for the practice of illegal acts of any nature. The commingling of assets is established when there is no de facto separation of assets, characterized by: (i) repetitive fulfillment of the shareholders’ personal obligations by the company or vice-versa; (ii) transfer of assets or liabilities without effective compensation; and (iii) other acts of non-compliance with property autonomy.

The Brazilian legal system provides that the disregard of the legal personality is one of the ways to recover and ensure the right of those who have been unduly harmed by the acts of society. Thus, the abuse of legal personality is identified by the deviation of purpose or the confusion of assets, and the causal link between this abuse and the benefit, direct or indirect, received by the partners or directors of the company must be demonstrated.

In Brazilian law, legal personality can be understood as the ability of certain entities to operate as subjects of law, thus possessing an autonomous personality, independent of the person of its shareholders or administrators. Thus, the legal entity has rights and duties, is responsible for the risks of business activity, and may contract obligations.

Once the company is admitted for registration, the corporate shield is recognized, and it could only be disregarded in situations in which the piercing of the corporate veil is applicable.

The purpose of piercing the corporate veil is to combat the misuse of the corporate entity by its shareholders. In this sense, the Brazilian system considers improper use of the legal personality not only the hypothesis of the partner emptying the patrimony of the society to defraud third parties, but also in the event that shareholders use the legal entity to protect their assets, exempting from their personal obligations. In this case, the reverse application of the disregard of the legal entity is allowed.

In this case, there is the deviation of purpose of the legal entity, making it necessary to prove that the personality was used for the purpose of harming creditors or for the practice of illegal acts of any nature.

It can also be characterized as asset confusion when the partner uses resources to cover his/her own expenses.

Since 2015, the law has provided for the “incident of disregarding legal personality”, outlining the procedure for reaching the assets of the shareholders in case of abuse. The interested party formulates the request before the judge, demonstrating the occurrence of the abuse; the shareholders are summoned to defend themselves and produce evidence; in the ruling, if the judge orders the disregarding, the shareholders' assets will be subject to respond to the debt.

The idea of a legitimate hidden partner is foreseen in the Brazilian system through the “sociedade em conta de participação”, in which the hidden partner invests capital but may not manage the company. The hidden partner’s liability is limited to the agreed investment, even in the insolvency context.

On the other hand, if a company is not constituted under the “sociedade em conta de participação” rules, the ilegitimate hidden partner or de facto administrator might be held liable for the company’s debts in the same way of the official partners/administrators, through the piercing of the corporate veil.

According to the law, the mere existence of an economic group without the presence of any deviation of purpose or equity confusion does not authorize the disregard of legal personality.

Still, in case of abuse of legal personality, piercing the corporate veil may occur in the context of corporate groups.

Conclusions about the doctrine of corporate veil in your legal system.

The legal entity is constituted with the registration of the company in the competent judicial body, thus, from that moment, the personality becomes autonomous and independent of the natural person of the partners, constituting own property, obligations, duties, and responsibility for the risks of business activity.

To prevent the abuse of the legal entity, the corporate veil may be pierced, to reach partners and administrators’ assets in liability of the company’s debts.

The disregard of the legal entity is exceptional, and may occur in cases of abuse, which Brazilian law consider to happen when there is either a deviation from the intended purpose of the legal entity or the commingling of assets (or under special circumstances, in favour of consumers and employees, or to sanction antitrust abuse and environmental damage).