The discussion on the applicability or not of inverse piercing of corporate veil is based on the systematic construction of Article 50 of the Brazilian Civil Code[1] (“CC”). In accordance with said Article, it occurs when certain company loses the autonomy of its assets, and the legal entity is held liable for obligations of the managing shareholder (and not the opposite), which directly affects the company’s assets.
In other words, the purpose of Article 50 of CC is to restrain the fraudulent use of a company by its shareholders, which can also occur in cases in which the controlling shareholder, with clear intent to commit fraud against third parties, transfers the ownership of his private assets to the legal entity, creating commingling of assets. Therefore, once there is proof of deviation of purpose and commingling of assets, harming the company’s interests and/or damaging third parties, it is clearly possible to occur inverse piercing of corporate veil due to debt of the managing shareholder, in accordance with the law.
Therefore, inverse piecing of corporate veil was referred as a protective measure against abuse of rights and fraud in a recent judgment of the Superior Court of Justice (“STJ”)’s 3rd Panel, when judging a Special Appeal. The judges have unanimously decided that the commingling of assets and deviation of purpose identified by the lower court judge justify inverse piercing of corporate veil.
In said case, the STJ has reversed the judgment rendered by the São Paulo State Appellate Court and reestablished the judgment rendered by the lower court judge, granting the inverse piercing of corporate veil and including the company’s managing shareholder as co-defendant in the enforcement action of extrajudicial instrument.
It is important to emphasize that the judgment rendered by the lower court judge has identified that the defendant company was incorporated with the purpose to escape from judicial asset freezing and from the payment of the debtor’s obligations, damaging the plaintiff/creditor’s rights.
Even though the judgment rendered by the lower court judge was reversed by the São Paulo State Appellate Court, such judgment was upheld by the STJ. Said Superior Court, through an analogic construction of Article 50 of CC, has understood that the conditions to authorize inverse piercing of corporate veil, which are commingling of assets and deviation of purpose, have been met. Commingling of assets was characterized because all resources originated from the company would be being transferred to the controlling company, clearly characterizing deviation of purpose, and harming third-parties rights to have their credit paid for.
Indeed, the judgment rendered by the STJ was correct, once said Superior Court did not consider the law’s literal construction, but it gave more weight to the law’s effects and consequences. Such judgment was focused on restraining fraudulent practices, which deviate the entities’ social function by using them as vessels to commit fraud against creditors or enforcement actions.
The judgment rendered by the STJ was based on a broad and general construction of Article 50 of CC, seeking to achieve the rule’s purpose and, above all, to protect the legal right involved. Hence, if by applying such doctrine, the company’s corporate veil is pierced so that the shareholder may be held personally liable for the company’s obligations, by inverse piercing of corporate veil the company’s assets may be used to fulfill the managing shareholder’s obligations. Nevertheless, both cases are meant to fight abuse of legal entity and fraudulent acts.
On the other hand, the Appellate Court has not agreed with this understanding, when reversing the judgment rendered by the lower court judge. Some jurists have the opinion that piercing of corporate veil is a mere consequence intended to affect only the practical effects of the judgment, and, by defending that, such jurists are struggling with the letter of the law, especially with respect to Article 50 of CC. As an example, these jurists’ opinion indicates that there are several critics as to the results of inverse piercing of corporate veil, such as conflicts among minority and controlling shareholders, lack of balance relating to minority and controlling representatives in the Board of Executive Officers, need for the banks to provide additional guarantee, among others.
In addition, these jurists’ opinion states that piercing of corporate veil does not comply with the rights to full defense and due process of law. Moreover, they state that we already have rules against frauds and respective applicable measures to fight them. It is certain that fraud against creditors could be fought by filling defeasance action, and that fraud against enforcement actions could be dealt with by declaring the ineffectiveness of transfer of ownership in the enforcement proceeding case files. Moreover, a sham transaction intended to harm third parties could be solved by filling for annulment of such act.
However, in spite of these arguments, it is important to highlight that the difference between the aforementioned actions and piercing of corporate veil lies on the speed to fulfill the plaintiff’s claim. While the other actions demand a prejudgment phase and the rendering of a judicial enforcement instrument (judgment), piercing of corporate veil can be a cause of action granted by the judge when analyzing the complaint’s claims or throughout an enforcement proceeding, as long as the legal requirements are met.
Moreover, upon the introduction of the New Code of Civil Procedure (“NCPC”), it is no longer possible to argue that piercing of corporate veil harms the right to full defense and due process of law, once such code acknowledges and implements said doctrine and the procedure to be complied with once the proceeding is triggered. It is important to emphasize that Article 135[2] of NCPC determines that the shareholder or the legal entities must be notified to reply and produce evidences within fifteen (15) days, which clears all possible doubts as to compliance with rights to full defense and due process of law.
Although the case analyzed herein occurred upon the validity of the Code of Civil Procedure of 1973, when piercing of corporate veil was not yet acknowledged and implemented, it is important to mention that the judgment rendered by the STJ remains correct. The reason for that is that the fraud committed by the company to relocate the amounts (which is a clear fraud against enforcement action) was duly proven.
Considering the foregoing, we conclude that STJ’s unanimous judgment on inverse piercing of corporate veil has confirmed that such doctrine is the most proper means to restrain possible frauds and abuses involving the legal entity. In addition, it is important to mention the express provision relating to piercing of corporate veil, acknowledged and implemented by the NCPC, which ensures the parties’ rights to full defense and due process of law. Thus, such doctrine is a fast and effective means to restrain fraudulent acts involving legal entities and to solve conflicts on the same matter.
[1] Article 50. In cases of improper use of corporate status, characterized by deviation of purpose or commingling of assets, the judge may decide, upon request by the Party or by the Public Prosecutor’s Office when applicable, the effects of certain and determined obligations to be extended to the private assets of the legal entity’s managers or partners.
[2] After the commencement of the proceeding, the shareholder or the legal entity shall be notified to reply and request the applicable evidence within fifteen (15) days.