LAW
Is Limited Liability Always “Limited”?
25 December, 2015
Is Limited Liability Always “Limited”?
BY TAMARA TKESHELASHVILI AND MARIAM ANTIA, lawyers at Mgaloblishvili Kipiani Dzidziguri (MKD) law firm

The Supreme Court of Georgia issued a landmark decision in 2015 (case #as-1307-1245-2014, case #as-1158-1104-2014) defining the scope of the personal liability of the shareholders and the directors of a company. The decision is important since it discusses the doctrine of piercing the corporate veil and interprets one of the core fiduciary duties – the duty of care.

Piercing the corporate veil

The Supreme Court ruled that the grounds for liability of the shareholders and the directors are inherently different, given their distinct status. According to the Supreme Court, the shareholders may be held personally liable (piercing the corporate veil), based on article 3.6 of the Law of Georgia on Entrepreneurs, if they misuse corporate forms of limiting liability. The Supreme Court broadly interpreted said clause, stating that personal liability could rise not only from the misuse of the corporate form, but also as a result of abusing limited liability. As the Supreme Court states, such abuse of corporate power is in place when the shareholder orchestrates activities aimed at tax evasion and the company is used by the shareholder as a tool for originating undeclared income. The burden of proof in such a case is on the plaintiff.

The duty of care

As for the personal liability of the director, the Supreme Court discussed the obligation of the director to manage the company in good faith and with due care, in the best interests of the company. The Supreme Court explained that the minimization of tax liabilities and appropriate tax planning are part of exercising due care, since it aims at increasing profit for the investors. Nevertheless, it does not justify involvement in the illegal schemes of tax evasion, due to the resulting criminal liability and the destructive effects it will have on the company in the long run. It also rips the director away from the benefits of the business judgment rule (i.e. the presumption that the decisions of the directors are informed, in good faith and in the company’s best interests). All in all, company directors shall aim at increasing profit, but shall do so only by lawful means.

According to the Supreme Court, if the company has an outstanding tax liability which it is unable to cover, and payment of indebtedness is essential for the state, as the creditor, the company is obliged to claim compensation
from the director, unless it is obvious that such claim is futile. If this is the case, the creditor shall request the covering of the outstanding liability from the company director.

Is verdict affecting the civil proceedings?

Another important take-away from the case is that according to the Supreme Court, the verdict against the company partners and directors (in a criminal case) is not an unconditional ground for making them liable in a civil dispute; such verdict is only one piece of evidence, and in civil proceedings, it shall be reviewed and assessed along with other existing evidences.

***
As a law firm, Mgaloblishvili Kipiani Dzidziguri (MKD) handles nearly all key aspects of Georgian law and advises on various investments in different sectors of the economy. The firm benefits from a large team of expert lawyers and a well-established network of external professionals to provide its international and domestic clients with more specialization and focus. According to international legal directories, MKD’s practice and lawyers have been consistently recognized as one of the leaders in Georgia.

The information provided in this article is general in nature and does not constitute legal advice.

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