Shell companies and defrauded creditors: Judgement by the Spanish Supreme Court number 673/2021 as a roadmap for piercing the corporate veil

Introduction

The Judgment of the Spanish Supreme Court (Civil Chamber) no. 673/2021, of 5 October, provides with a clear and practical ruling on the piercing of the corporate veil, by declaring the joint and several liability of the partners of the company debtor of a construction contract.

This judgment addresses the conditions and limits of the doctrine of piercing the veil, and shows us that, despite its exceptional nature, this figure is fully applicable when there are clear indications of abusive instrumentalization of a company.

Since the factual elements of this type of fraud concurred in this case – asset emptying, coordinated dismissal of directors, sale of shares to untraceable entities and absence of real activity beyond the business generating the debt – the Supreme Court does not hesitate to apply the doctrine of piercing the corporate veil to hold the partners who orchestrated the maneuver jointly and severally liable, even if all alternative legal remedies have not been previously exhausted, provided that their practical impossibility is proved.

In this case, the claimant had entered into a works contract with a company, and the latter had failed to pay the invoices issued as a result of the contract. The plaintiff claimed payment of these amounts against the partners and directors of the company with which the contract had been signed, after both a separate promissory note payment claim and a criminal claim had failed. The partners had emptied the company, ceased as directors and sold their shares to an untraceable entity, all days before the maturity of the unpaid promissory notes. The Supreme Court overturned the appeal judgment and confirmed the joint and several liability of the partners, excluding only the director appointed later for lack of proven intervention in the fraudulent maneuvers.

The piercing of the corporate veil legal doctrine

In this judgement, the Supreme Court systematizes the guiding principles of the doctrine of piercing the veil. As a starting point, the general rule is respect for the legal personality of companies, so that their obligations do not affect partners or administrators except in the cases provided for by law. However, exceptionally—in cases of undercapitalization, confusion of personalities, external management, or fraud—it is necessary to lift the veil to prevent legal personality from serving as a cover for the disregard of the legitimate rights of third parties.

The normative basis of this doctrine is found in the principle of good faith (Article 7.1 of the Civil Code), connected with the abuse of the right and fraud of law (Articles 7.2 and 6.4 of the Civil Code), figures that represent an overreaching exercise of the right contrary to said principle. The judgment insists on its exceptional nature and restrictive application: the typology of cases is not a numerus clausus, but each one requires its own presuppositions. In addition, the doctrine operates on a subsidiary basis, that is, when the creditor does not have another specific action to enforce his claim.

Finally, the Court specifies that passive standing in these cases is not limited by the principle of relativity of contracts (Article 1257 of the Civil Code), but that the doctrine allows for a different standing to be effective than that resulting from the contractual relationship maintained with the company.

The case

In this case, the Supreme Court identifies a set of circumstances that, assessed globally as a complex operation, evidence fraud and justify the lifting of the veil.

First, the instrumental constitution of the company: the defendant company was created with a minimum capital of 3,200 euros and was only active during the term of the construction contract (2007-2009), which revealed its purpose of hiding the assets of the partners from creditors. Second, the emptying of assets: the profits obtained from the real estate development were distributed among the partners, leaving the company without assets with which to meet its debts. Third, the coordinated strategy of disassociation: a few days before the maturity of the promissory notes, the partners ceased as administrators, appointed an untraceable person and sold their shares to a company with no known activity.

To these circumstances is added the accreditation of animus nocendi: both instances recognized that the partners were at all times aware of the damage caused to the plaintiff. Finally, the Court verified the subsidiary nature of the action: the plaintiff had reasonably exhausted the available collection channels – an unsuccessful exchange trial for four years and a lawsuit filed due to the statute of limitations – without being able to be reproached for not having brought the action for directors’ liability (article 236 LSC), since it had expired due to the prolongation of the foreign exchange procedure itself. The Court stresses that none of these transactions should be assessed in isolation, since it is their joint examination that reveals the tortuous and fraudulent conduct.

Conclusions

This judgment offers four main lessons. First: the doctrine of lifting the veil is a fully operative instrument in the face of the fraudulent use of legal personality, correcting the Supreme Court to the Provincial Court, whose reasoning – that the debt belonged to the company and not to the partners – contradicted the very essence of the doctrine. Second: subsidiarity does not require exhausting all legal actions, but rather proving the effective impossibility of collection by other means, without being able to reproach the failure to exercise actions already prescribed for reasons attributable to the debtor himself. Third: the indications of fraud must be analyzed globally, since individually lawful acts can reveal, as a whole, a fraudulent act. Fourth: the extension of liability does not automatically operate against any person linked to the company, but requires the effective accountability of the conduct constituting the fraud.

In short, this resolution ratifies the consolidated parameters of the doctrine of lifting the veil and rigorously applies them to a paradigmatic case of fraud through corporate instrumentalization. A jurisprudential reference that serves as a roadmap to extend the legal actions available to a debtor who has been harmed by a fraudulent strategy orchestrated by a corporate group to circumvent its debts.