Company Director’s Liability for Debts: Piercing the Corporate Veil
Pedro Silva is the sole director and 90% shareholder of 'Construções Silva, Lda.', a construction company. In 2023, the company contracted with 'Fornecedores ABC' to supply materials worth 10 million Kz. The company paid only 3 million Kz and then became insolvent. ABC sued Pedro personally for the remaining 7 million Kz, arguing that Pedro used company funds for personal expenses (a new car and a vacation) and that he failed to maintain proper accounting records. Pedro argues that the company is a separate legal entity and that he is not personally liable. The Commercial Code (Law 1/04) allows piercing the corporate veil in cases of abuse of the corporate form, such as commingling of assets or fraud.
1. Under what circumstances can the court pierce the corporate veil to hold Pedro liable?
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The court can pierce the corporate veil if there is abuse of the corporate form. Under the Commercial Code, factors include: (1) commingling of personal and company assets (Pedro used company funds for personal expenses), (2) failure to maintain proper accounting records, (3) undercapitalization, and (4) fraud or improper conduct. Here, Pedro’s use of company money for a car and vacation indicates commingling. The lack of proper accounting records further supports piercing. The court will consider whether the company was a mere façade for Pedro’s personal dealings. Since Pedro is the sole director and majority shareholder, and he diverted funds, the court is likely to hold him personally liable for the company’s debts.
2. What evidence would ABC need to present to succeed in its claim against Pedro?
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ABC must present evidence showing: (1) Pedro’s personal use of company funds (e.g., bank statements, receipts for the car and vacation), (2) inadequate accounting records (e.g., missing invoices, lack of financial statements), (3) that the company was undercapitalized or not maintained as a separate entity, and (4) a causal link between Pedro’s actions and the company’s inability to pay. ABC should also show that Pedro’s actions were intended to defraud creditors or that he treated the company as his alter ego. Witness testimony from employees or accountants could help. The burden is on ABC to prove abuse; mere insolvency is not enough. The court will weigh the evidence to decide whether piercing is justified.