Academic journal article Business Law International

Supreme Courts in the Nordics Pierce the Corporate Veil – Is the Limited Liability of the Shareholders at Risk?

Academic journal article Business Law International

Supreme Courts in the Nordics Pierce the Corporate Veil – Is the Limited Liability of the Shareholders at Risk?

Article excerpt

One of the fundamental principles of corporate law is that the liability of the shareholders of a limited liability company is limited to their stake in the company. They cannot be held personally liable for the company's debts. The limited liability of the shareholders is often even considered the most characteristic feature of a limited liability company1 and the principle is expressly stated in both the Finnish and the Swedish Companies Acts.2 Apart from a specific exception in respect of limited liability law firms, in which case their partners are personally liable for some of the company's responsibilities, there are no statutory exceptions to the principle of the shareholder's limited liability.3

Legal scholars have, however, advocated the possibility of holding shareholders liable for the company's debts in certain exceptional circumstances. Now, the Supreme Courts in both Finland and Sweden have, within quick succession, handed down landmark decisions, in which the corporate veil of a limited liability company has been pierced in accordance with the alter ego theory and the shareholders have been held liable for the companies' debts. This article analyses these two judgments and their implications, and discusses the prerequisites for personal liability for a limited liability company's debts in light of the judgments.

Background

The case before the Swedish Supreme Court

In its ruling of 11 December 2014, the Swedish Supreme Court held the shareholders of a litigation funding company liable for the company's counterparty's procedural costs after the litigation funding company had lost its case and filed for bankruptcy.4

The litigation funding company was a Swedish limited liability company that had been set up for the sole purpose of pursuing a damages claim against an audit firm. The shareholders of the litigation funding company had previously been shareholders in two companies that had been clients of the audit firm. Both companies went bankrupt and the bankruptcy estates claimed damages from the audit firm, arguing that the audit firm had caused damage to the companies by acting negligently when giving tax advice to the companies.

The claim against the audit firm was filed by the bankruptcy estates on 25 March 2004 and the right to pursue the claim was sold to the litigation funding company on 11 November 2004. The litigation funding company's claims were dismissed by the district court and the litigation funding company was ordered to compensate the audit firm for its procedural costs in the matter. The district court's judgment was given on 21 March 2011 and the litigation funding company filed for bankruptcy a week later on 29 March 2011. The audit firm did not receive any compensation for its procedural costs from the bankruptcy estate.

The audit firm initiated proceedings against the shareholders of the litigation funding company. The audit firm argued that the shareholders should be held personally liable for the audit firm's procedural costs from the first proceedings based on the doctrine of piercing the corporate veil. The audit firm's claim was approved by the Stockholm District Court and the shareholders of the litigation funding company were held personally liable for the audit firm's procedural costs in the proceedings between the litigation funding company and the audit firm. The district court's ruling was upheld by the Svea Court of Appeals and, ultimately, by the Swedish Supreme Court.

The case before the Finnish Supreme Court

Less than three months after the Swedish Supreme Court's ruling was issued, the Finnish Supreme Court issued a judgment in which the Finnish shareholder of an Estonian limited liability company was held liable for the Estonian company's debt.

The Finnish shareholder was a company engaged in retailing electronic devices to Finnish customers through its web shop and its warehouse in Helsinki, Finland. Part of its business activities were organised through an Estonian limited liability company. …

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