ARTICLE
29 January 2024

Corporate Law 22.1.24 The Lifting Of The Corporate Veil View

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Fenech & Fenech Advocates

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Established in 1891, Fenech & Fenech Advocates is a multi-disciplinary full service law firm with diverse areas of expertise, including corporate and commercial law, M&A transactions, financial services, tax, immigration, banking, trusts and foundations, aviation, intellectual property, maritime law and marine litigation, yachting, employment law, environmental law and various other areas.
When a limited liability company is incorporated, registered and thereafter included in the Maltese Registry of Companies in terms of Maltese law...
Malta Corporate/Commercial Law

When a limited liability company is incorporated, registered and thereafter included in the Maltese Registry of Companies in terms of Maltese law, the company acquires a legal personality which is separate to that of its members. Having a separate legal personality implies that the company is considered to be a distinct legal entity separate from its shareholders, directors or other company officers. This separation provides several advantages, including limited liability for the shareholders, allowing them to safeguard their personal assets from the company's liabilities.

The separate legal personality allows the company to enter into contracts, own property, sue and be sued in its own name. Shareholders are generally not personally responsible for the company's debts beyond their investment in the company. This principle encourages entrepreneurship and investment by mitigating the risk associated with business activities.

However, the concept of separate legal personality is not absolute, and Maltese law recognises certain circumstances in which the corporate veil may be lifted. The lifting of the corporate veil refers to situations where the law or the courts look beyond the legal personality of the company and hold the directors, other company officers (such as the company secretary) or even the shareholders personally liable for the company's actions or debts.

There is a fundamental principle under Maltese law which provides that an agent or mandatory is not liable for the acts performed on behalf of the mandator. The directors and, possibly also other company officers, are deemed to be mandatories of the company, which is the mandator. The lifting of the corporate veil is therefore also an exception to this fundamental principle.

One common ground for lifting the corporate veil in Maltese law is when there is evidence of fraud or improper conduct. If the company is used as a façade for fraudulent activities, the court may disregard its separate legal personality to expose the individuals behind the misconduct. Similarly, if there is evidence of abuse or misuse of the corporate structure to perpetrate injustice or defraud creditors, the courts may intervene.

Additionally, the corporate veil may be lifted in cases where the company is deemed a mere agent or alter ego of its shareholders or directors. This occurs when there is a lack of genuine separation between the company and its controllers, and the company is used to carry out the personal wishes or business of the individuals in control for abusive purposes or with intent to leave creditors in the lurch.

It's important to note that the circumstances under which the corporate veil may be lifted are fact-specific, and each case is considered on its merits. Courts generally exercise caution in lifting the corporate veil to ensure a proper balance between the principle of separate legal personality and the need to prevent abuse or injustice.

The Companies Act (chapter 386 of the laws of Malta) provides what Prof Andrew Muscat 1 refers to as “statutory inroads” which he says, “penalise the human or corporate constituents of a company for some form of wrongdoing”. Two examples of these statutory inroads are the cases of fraudulent trading 2 and wrongful trading 3.

In the case of fraudulent trading, the law provides that if in the course of the winding up of a company, it appears that any business of the company has been carried out with the intent to defraud creditors, of the company or creditors of any other person, or for any fraudulent purpose, the court may, if it deems fit to do so, declare that any persons who were knowingly parties to such acts, be held personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company. Here the law imposes not only a civil sanction on the wrongdoer, but also a criminal one, which can even result in imprisonment. The provision is far reaching in that it refers to ‘any persons' that may have been involved in the wrongdoing so that the liabilities of the company may be imposed not only on directors or other officers of the company but also on shareholders, managers or even employees that may have been involved.

Wrongful trading on the other hand, exists where a company has been dissolved and is insolvent and it appears that a person who was a director of the company knew, or ought to have known prior to the dissolution of the company that there was no reasonable prospect that the company would avoid being dissolved due to its insolvency. In this case the court may declare the director to be liable to make a payment towards the company's assets as the court thinks fit. While this provision is limited to directors only it should be noted that Maltese law recognises the concepts of shadow or de facto directors, that is persons who while not registered officially as directors of the company have such influence over the affairs of the company that the law considers them to bear the same responsibilities as directors. These other persons may also be caught by the wrongful trading provision.

Another statutory inroad which may lead to the lifting of the corporate veil is included in the Value Added Tax Act (chapter 406 of the laws of Malta – the “VAT Act”). The law provides that company “representatives” 4 are liable for the company's failure to satisfy its obligations under the VAT Act. In terms of the VAT Act, liability arises for the payment of VAT, administrative breaches and criminal offences. While liability for administrative breaches bears the form of administrative fines, liability for criminal offences can take the form of fines and, or imprisonment. Company representatives (as defined) are jointly and severally liable for the tax due by that company.

It is pertinent to note that these are not the only cases where individuals involved or engaged with a company can be held liable for actions perpetrated by, or through the company (other pertinent laws include other provisions of the Companies Act itself, income tax laws, employment laws, health and safety laws and others). The above are just some examples which illustrate that the notion of separate legal personality may be partially set aside by the court, which in practice may result in an exception to the separate and distinct legal personality of the company and the privilege of limited liability that comes with it.

Footnotes

1. In his book “Principles of Maltese Company Law” (second edition)

2. Article 315 of the Companies Act

3. Article 316 of the Companies Act

4. Which are defined in the VAT Act as “Any secretary, manager, director, liquidator or other principal officer of an entity or of a body of persons, any heir and any testamentary executor and any curator of the vacant inheritance of a deceased person, and any person who is a tutor, curator, administrator or trustee of any other person or of any trust, fund or other entity

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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