Piercing the Corporate Veil

Piercing the corporate veil: expanding creditors' options to recover debts from debtors and their beneficiaries — without initiating bankruptcy. The doctrine of "piercing the corporate veil" (also known as "lifting the corporate veil", or in German law Durchgriff hinter den gesellschaftsrechtlichen Schleier) was first mentioned in a Russian court act in 2012. Under it, where certain conditions are met, liability for a company's breaches of obligations is imposed on the persons who fully control it, if the company is merely their "vehicle" — a formal front for bad-faith activity.

The essence of the doctrine

In substance, this is a refusal to apply the "separation principle" between the company's assets and those of its participants — an disregard of the legal personality of the entity, and the right of the company's creditors to extend liability to the personal property of its participants, managers, or other persons controlling the entity (Ruling of the Krasnoyarsk Region Commercial Court of 02.11.2015 in case No. А33-7445/2015).

In other words, instead of the debtor, the persons controlling it can be held liable. This is an extremely useful instrument that ought to be popular among creditors and enforcement claimants — and, in our view, applied in almost every case that does not end in repayment of the debt. In practice, however, the situation is different. Perhaps those who need to know about the available options — and controlling persons who need to know the consequences — simply are not aware of them.

Statutory framework

Currently, article 53.1(3) of the Russian Civil Code provides that a person having the actual ability to determine a legal entity's actions, including the ability to give instructions to the persons named in paragraphs 1 and 2 of that article, must act in the entity's interests reasonably and in good faith, and is liable for losses caused through their fault to the entity.

There are also rules on the liability of a parent company for instructions given to subsidiaries, and bankruptcy-law rules providing for the subsidiary liability of controlling persons.

However, article 53.1 unfortunately grants the right to recover losses only to the participants (founders) of a legal entity. Accordingly, a creditor has no such right; and where the interest lies in holding a founder (participant) liable, that becomes unworkable given the absurdity of a founder acting against itself. The rules on parent-and-subsidiary liability also have very limited scope, and bankruptcy proceedings are not always economically justified — even setting aside the low percentage of creditor-claim satisfaction (statistics have cited figures of 4–5%).

It is precisely in this situation — where the rules of substantive law do not ensure prompt protection of creditors' rights — that the "piercing the corporate veil" doctrine comes into play.

The slow development of practice

The former Chairman of the Supreme Commercial Court, in a 2012 interview, remarked that lawyers had called the court's recent decision on lifting the corporate veil — in the dispute between minority shareholders of the Kirov Plant and its management — a revolution and a breakthrough. What impeded the doctrine's adoption, he suggested, was the mindset of judges trained in formalism and of parties who do not raise such claims. He predicted that, as with tax cases in the 1990s, courts would eventually be compelled to consider "veil-lifting" arguments once parties began to raise and substantiate them — estimating at least two years to form practice.

Two years proved insufficient. If one looks at case law that directly and unambiguously mentions the "corporate veil", no more than around 80 such acts could be found over five years. The main obstacle is the desire to uphold the principle of limited liability and the autonomy and independence of the legal person. Yet at times plain formalism appears — for example, courts holding that participants of a limited liability company cannot be answerable for the company's debts, and that a claimant has failed to provide proper legal grounds for how independent economic actors could bear liability for the obligations of a separate legal entity.

What this means for creditors and international clients

For foreign creditors and investors dealing with Russian counterparties, the doctrine offers a route to reach the real beneficiaries behind an insolvent or asset-stripped company — without the cost and delay of full bankruptcy proceedings. Its application remains discretionary and fact-specific: success depends on evidence that the company was used as a mere instrument, that assets were diverted, and that the controlling person acted in bad faith. Building that evidence base, and framing the claim correctly, is decisive.

Related materials

• Subsidiary liability of business beneficiaries

• Bankruptcy of legal entities