The Lifting of the Corporate Veil Doctrine in Spain

 

The most frequently used business entities in Spain are the Limited Liability Company (Sociedad de Responsabilidad Limitada) and Join Stock Company (Sociedad Anónima). In both cases, the liability is generally limited to the amount of the capital stock contributed by each of them.

Nevertheless, in exceptional cases, liability shall be sought from the shareholders in order to protect the interest of other third parties. Along with the provisions of the Corporate Enterprises Act, which is the basic legal text that regulates the different legal forms of capital companies envisaged in Spain, there is an important body of case law in the field of Corporate Law. In this context, in those exceptional circumstances where liability may be sought from shareholders to protect third parties, Spanish courts apply the Anglo-Saxon doctrine of “lifting the corporate veil”, as a reaction to misconduct by the shareholders while fraudulently sheltering behind the company’s legal personality.

 

As is known, under Corporate Law, a corporation is specifically referred to as a legal person, subject of rights, duties and capable of being part of contracts, owning real property and having the ability to sue and be sued. Generally, when forming a company, it offers limited liability to its shareholders, like in the case of the Spanish Limited Liability and Join Stock Company, which means that a shareholder may only lose what he has contributed as shares to the entity, and nothing more, since a registered company is a separate legal entity distinct from its shareholders, and therefore, it shall be treated as any other person with its own responsibility.

 

The case of Salomon V. Salomon & Co (U.K. 1897) is the foundational case and precedence for this doctrine of corporate personality.

Facts of the case: Mr Aaron Salomon was a British leader merchant who had a boot manufacturing business which he decided to incorporate into a private limited company. By 1892, Mr Salomon decided to incorporate his business as a Limited Liability Company, Salomon & Co. At that time, the legal requirement for incorporation was that at least seven persons had to subscribe as shareholders, so he designated his wife, daughter and four sons as shareholders. Two of the sons became directors and Mr Salomon himself was managing director. Mr Salomon owned 20,001 (of one pound each) shares of the 20,007 (the remaining six where shared individually between his family). Mr Salomon sold his business to the new corporation for almost 39,000 pounds, of which 10,000 was a debt to him. Thus, he was the company’s principal shareholder and creditor simultaneously.

When the company went into liquidation, the liquidator argued that the debentures used by Mr Salomon as security for the debt were invalid on the grounds of fraud, and the Judge accepted this argument, ruling that since Mr Salomon had created this company solely to transfer his business, the company was in reality his agent and he as principal was liable for debts to unsecured creditors.

After this case, the lifting the corporate veil is a common legal doctrine through which shareholders are held accountable by considering the corporate action as it was the shareholders. Case law and scholarly opinions reacted against situations which involve abuse of legal personality, and that is why all jurisdictions offer doctrinal tools for holding shareholders liability, and this doctrine is one of these tools, but different states have different approaches. Among others, the Spanish Supreme Court has adopted the formulation of this doctrine to exercise rights in good faith and interdict abuse of rights and fraud. However, this doctrine can only be applied in exceptional basis and in moderation in the interests of legal certainty. Accordingly, it is applied as a last resort remedy, such as: overlapping of confusion of patrimonial spheres, underfunding of companies and abuse of legal personality for purposes of infringing obligations or against the law.

 

Reference:

 

La doctrina jurisprudencial del levantamiento del velo societario

http://europa.eu/epso/doc/es_lawyling.pdf

Introduction to Spanish Private Law https://books.google.com.tw/books?id=78-LAgAAQBAJ&pg=PA74&lpg=PA74&dq=doctrina+del+levantamiento+del+velo+spain+doctrine+veil&source=bl&ots=PRwEHiEfAO&sig=pY6uUbIlCIL4faNYcdP7xflFBZ8&hl=es&sa=X&ved=0ahUKEwi90-qzvszMAhUEtJQKHfpfAw8Q6AEIITAB#v=onepage&q=doctrina%20del%20levantamiento%20del%20velo%20spain%20doctrine%20veil&f=false

Salomon V Salomon & Co is a Foundational http://www.lawteacher.net/free-law-essays/company-law/salomon-v-salomon-co-foundation-company-law-essay.php

 

 

 

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