On 3 April 2019, the Luxembourg court of appeal reiterated certain principles applicable for a claimant seeking to pierce the corporate veil of a Luxembourg limited liability company to bring a legal action directly against its sole shareholder.
In the case at hand, the share capital of a Luxembourg public limited liability company (société anonyme) holding a building plot (“PropCo”) was split between, among others, the defendant (under his own name and via a company referred to as “SOC 3” in the decision) and another company which was wholly owned by the claimant.
Pursuant to an agreement concluded by and between the claimant and the defendant on 8 August 2000 (the “Agreement”), the defendant undertook to ensure that SOC 3, which was not a party to such agreement, shall share with the claimant’s entity half of the profit generated by the transfer of the shares in PropCo.
Several years after such transfer had been completed, the claimant brought a legal action against the defendant and claimed, among other things, that the Court shall pierce the corporate veil of SOC 3 and rule that the defendant, in his capacity as shareholder of SOC 3, shall be liable for the payment of sums due under the Agreement.
In the case at hand, the Court first noted that SOC 3 was not a party to the Agreement which was entered into by the claimant and the defendant in his personal name (and not in his capacity as representative or shareholder of SOC 3). The Court then inferred from the provisions of the Agreement that the defendant undertook to ensure that SOC 3 will indeed pay to the claimant half of the profit to be made in relation with PropCo’s transfer of shares.
This commitment of the defendant was qualified by the Court as an undertaking on behalf of a third party, i.e. SOC 3 (a promesse de porte-fort governed by article 1120 of the Luxembourg civil Code).
Based on these observations, the Court reminded that in case of breach of an undertaking on behalf of a third party, the defendant, may not be ordered to perform such obligation but may only be held liable for the damages incurred by the party towards which the commitment has been undertaken, in case SOC3 does not fulfil the relevant obligation itself.
The Court then stated that the corporate veil separating a Luxembourg limited liability company and its sole shareholder may only be pierced if a plurality of consistent elements substantiates a misuse of the legal capacity of the company in the personal interest of its sole shareholder.
In other words, in order to pierce the corporate veil of a limited liability company, one should demonstrate that there is a confusion between the actions and/or the estate of the company and the actions and/or the estate of its sole shareholder resulting from the behaviour of the latter.
In the case at hand, the Court ruled that the mere holding of the shares in SOC3 by the defendant as sole shareholder was not sufficient to justify piercing the corporate veil.
Finally, the decision confirmed that as SOC3 had indeed paid to the claimant’s entity its portion of the consideration due further to the transfer of the shares in PropCo, the defendant had fulfilled his undertaking by ensuring such payment and thus incurred no personal liability.