Piercing of Corporate Veil and De-facto Directors in Slovakia
The Slovak Ministry of Justice was very busy last year, and the recent amendment to the Commercial Code introduces a number of provisions that are aimed at fixing local malpractice related to mergers and liquidation of companies, use of “straw men” as executives and the impact of bad decisions of shareholders on the local affiliates.
In a previous post, we covered the topic of increased liability of executives for not filing the petition for bankruptcy. However, the Ministry of Justice did not stop just there.
Corporate Veil Pierced
From January 1, 2018, it introduced into the Commercial Code a liability of a controlling entity for insolvency of a controlled entity. This, in practice, means that shareholder is no longer fully protected by a corporate veil and can be held liable for an affiliate’s insolvency in some situations. This protection, however, is only be lifted if the controlling entity passes two specific tests.
The first one is a “materiality test”. A controlling entity can be held liable for damages incurred by creditors as a result of debtor’s/affiliate’s insolvency if, through its actions, it substantially contributed to the insolvency of a controlled entity. This materiality test, however, is somewhat subjective and case law will be needed to give some guidance.
The second test is, obviously, the insolvency of a controlled entity. This one is easy to determine as the insolvency is presumed in case the bankrutpcy proceedings is cancelled or the petition is refused due to insufficent assets or the execution proceedings has been terminated for the same reason.
A creditor has to claim damages within one year from the day that the respective decision on termination/cancellation becomes final. Unless the debtor proves otherwise, the damages amount to the outstanding amount of receivables after termination/cancellation of the proceedings.
There have been cases in Slovakia where economically vulnerable people were abused and appointed as executive directors of companies, who would then allow others to act as de-facto directors for a company (e.g. under a general power of attorney) with little legal consequence. This practice lead the Ministry of Justice to introduction of concept of “de-facto director”, which has existed for some time in other jurisdictions – for example, UK or France – with minor differences in interpretation.
In Slovakia, a de-facto director (or “director in fact”) is defined as someone who exercises the powers/competence of a director, but who has not been formally appointed. It covers both individuals and legal entities.
There is no subjective test and the matter is determined on an objective basis and irrespective of the person’s motivation or belief. All relevant facts need to be taken into account in determining whether or not a person (individual or a company) will be deemed to be a de-facto director. Such facts taken into consideration could include, for example, whether there are other persons acting as directors, whether the acting person has been held out as acting as a director (including using the title “director” in communications), or whether a person has been considered to be a director by the company or third parties, and in what capacity was such person acting.
The question of whether or not a person is a de-factor director may arise in a wide variety of contexts, particularly for general managers, but also lenders and creditors of a company or a joint venture shareholder (depending on the rights vested to them under respective contract).
A de-facto director must carry out their duties in line as a “de jure director” and may be held jointly and severally liable with de jure directors for damages. Also criminal liability may be applicable.
Managing the Risks
Managers need to recognize when they are at risk of becoming a de-facto director and, if they do assume these roles, they should make sure that they comply with all relevant duties and obligations of de jure directors. They should also consider becoming formally appointed (as a de jure director) so that there is no doubt as to their position, or by making sure that they only act on the instructions of the board.