Artificial Property Arrangements and Veil Piercing

Artificial arrangements can include a corporation, and the section can be used to pierce the veil during the enforcement procedure.²⁹⁴ The corporation is either the third party or the debtor. The corporation as a third party is problematic for the secondary nature of collecting from the artificial property arrangement if the debtor owns the corporation. Then the shares can be attached, and other measures are available to prevent the debtor from destroying the share value should they hold a position within the company. Should those measures be obviously insufficient,

295 veil piercing is possible by applying Enforcement Code 4:14. Shares of a private company are hard to sell: there are few buyers, and this usually means a discount in price. Additionally, Enforcement Codes 4:38 and 4:37, which prohibit the debtor from using their control over the company in a manner detrimental to the creditors, do not limit the debtor’s competence in doing so. This provides the debtor with a window of opportunity to make additional arrangements. It is thus often more effective to get direct access to the corporate property through the artificial property arrangements section, even if this potentially leads to time-consuming litigation.

The biggest difference between veil piercing and setting aside artificial arrangements is about the emphasis on the assessment of artificiality. Veil piercing aims to determine whether the use of the corporate form is artificial and can be set aside to hold the actual actor liable. Artificial property arrangements are about property and ownership. The aim is to assess whether the ownership arrangement is artificial and whether it can be set aside to have the property cover the liabilities

294 See also Lindfors 2008 at 318. She is of the opinion that the doctrines have the same moral justi-fication, but the ambiguous nature of piercing prevents it from being used as a point of analogy in the development of the artificial property arrangements section. Two things have changed since Lindfors gave her opinion: The veil piercing doctrine has become less ambiguous as of KKO 2015:17. Second, the artificial arrangements section has become less ambiguous itself, allowing its use as a point of analogy.

295 However, one can claim that the measures are always insufficient. Even if the property of the cor-poration is deemed liable for the debt, or alternatively, if the shares are attached, the debtor can still hold a position within the corporation. Although the Enforcement Code 4:38 prohibits the debtor from dis-pensing, it does not limit the competence the debtor as the representative of the company. The debtor is still able to make legal actions, although they are not binding toward the creditors. Yet this does not matter for the debtor, as they are still able to hide the property. Items can be sold and the money can be made to disappear. This does lead to criminal liability, though, as property is lost to the detriment of the creditors. Excluding possible jail time or fines, the debtor’s overall liability does not rise. The tort compensation is limited to the amount of the damage, and the damage is the sum of the original debt. The actions themselves, as the corporate representative, might be cause for tort liability and might act as an independent basis for liability, they cannot add up to the compensation amount. As soon as the original debt is paid, there is no damage. Consequently, the debtor must then be a customer at the enforcement proceedings for at least 15 years (possibly 25 if extended). Therefore, the cost of hiding the corporate property is high, including the original liability, criminal liability, possible jail time and having to pay most of the income to creditors for possibly even a quarter century (or hide them). If the corporation had sig-nificant enough funds and the debtor is able to utilize them in secrecy from the creditors and enforcement officials, hiding the funds could prove reasonable.

of the de facto owner—the person who, according to the facts of the case, holds the significant elements of ownership. Veil piercing means holding additional person(s) liable for an obligation of another. Artificial arrangements are about using one’s property to satisfy an obligation of another. In one, the assessment of artificiality is about a person, and in the other, it is about property.²⁹⁶

This difference in the viewpoint is not that significant for the analogy. As I have argued before in this work, every veil piercing decision is made in casu, and the nature of the norms involved in the abuse of rights situation or the conflicting norms lend their attributes to the assessment. Artificial property arrangements nature centering around property is only necessary due to the enforcement procedure being about property. On another occasion, the assessment of whether to pierce the veil could reflect the personal actions and causality between them and damage. The end result is the same: one person is deprived of a benefit, whereas another retains it. It would thus seem that this sort of difference is only inherent in the doctrines reflecting the prohibition of the abuse of rights and serves not to diminish the analogic support they offer one another.

In the KKO 2004:52 decision, the Supreme Court discussed the relationship between veil piercing and artificial arrangements. The choice of the corporate form is protected by the freedom of business provided in the constitution.

Formal validity of the choice does not exclude it being an artificial property arrangement, although ignoring it is possible only exceptionally. The use of the corporate form can be an artificial property arrangement if the choice to use the form cannot be explained with economic reasons, but only if the avoidance of enforcement makes it the reasonable choice.²⁹⁷ Oddly enough, case KKO 2006:45 was about piercing in an offshore company. The decision seems to dictate that attachment is possible only if the veil is pierced and the ownership is deemed artificial.²⁹⁸ The section’s wording or preparatory works do not support this dual requirement. Attachment should be possible if either is present.²⁹⁹ Requiring both would lead to nonsense: the property can be attached if the formal owner is held liable for the obligations of the debtor and he is the actual owner of the property.

Veil piercing seems possible at least when there are no reasons for the corporation’s existence other than avoiding attachment. This would mean setting aside the whole

296 See also Lindfors 2008 at 319 and Laine 2011 at 173.

297 See Laine 2011 at 173. This strong protection of the freedom of entrepreneurs to choose the form they operate under has been reasserted in later decisions in KKO 2004:96 and KKO 2006:45.

298 See KKO 2006:45 at 9.

299 For the same conclusion, see Linna – Leppänen 2015 at 163. The property of the corporation can be attached, but only the parts of it that are hidden by abusing the corporate form.

corporation—combining the property of the corporation and the debtor. This deviates from the wording of the section, which emphasizes the direct relationship between the property and the debtor. The total combination of properties differs from holding specific property liable for the debt. It should remain possible to repossess some property from a corporation with an actual business without piercing the veil if said property is hidden in the business and it’s possession has no connection to the business.³⁰⁰ That is, if the presence of the property in the corporation has no economic purpose for the business itself and corporate ownership can be reasonably explained only by the avoided enforcement. There should be no need to set aside the whole corporation.

According to Linna, the application of 4:14 of the Enforcement Code allows the courts to consider some less juridical material in addition to the traditionally significant legal criteria. The interests, received benefits and bearing of negative risks all become meaningful in a legal assessment of the arrangements. What is required of ownership for it to prevent attachment? Why was ownership arranged the way it was? The assessment must widen to cover all the relevant legal actions and facts instead of focusing on a single legal relationship. Contractual considerations affect the ownership consideration in an extraordinary fashion. The extraordinary elements come to show that the arrangement is artificial.³⁰¹

The inclusion of these non-traditional elements in the consideration is common for artificial arrangements and veil piercing. Both must consider the overall arrangement of the case and find the extraordinary material that separates the arrangement from ordinary trade or business. They must both utilize material facts to uncover the reasons behind the arrangement. The relationships between material facts and their interpretation eventually form legally significant evidence. Much of the argumentation around veil piercing presented in this work takes an isolated material fact and discuss its implications and eventually whether the fact supports or opposes veil piercing.

From this short examination, it is easy to see how artificial arrangements provide an excellent point for analogy with piercing. The KKO 2015:17 decision mentions it as one example of sections that allow piercing. The section enables piercing within the context of ownership, and the case law surrounding it has developed some criteria for the piercing doctrine. A more theoretical point of analogy is also available, as both doctrines focus on the disparity of form and substance and utilize overall assessment of the arrangement. Artificial property arrangements thus offer help in the interpretation of significant facts and forming the structure of the piercing assessment.

300 See Helsinki Appellatte Court 22.9.2017 no. 1134 and Linna – Leppänen 2015 at 162–163.

301 See Linna 1999 at 342–347.

2.3. Environmental Damage Liability 2.3.1. Introduction

The Act on Compensation for Environmental Damage provides some tools for the veil piercing assessment. Section 7 Paragraph 1 Subparagraph 2 of the act directly addresses veil piercing. The scope of the application of the act is limited, however. It was created to ease the damaged parties’ access to compensation in environmental damage cases.³⁰² Section 1 limits liability to environmental damage caused by activities carried out in a certain area and resulting from 1) pollution of the water, air or soil; 2) noise, vibration, radiation, light, heat or smell; or 3) another similar nuisance. It is further specified in the section that the keeper of a road, railway, airport or other comparable traffic area is also considered to be practicing the above activities. This is a significant limitation.

Section 6 of the act broadens the liability a bit. In some cases, the proper authorities or persons threatened by the damage take action to limit the damage or prevent it entirely. Alternatively, they may even remove the damage and restore the environment of the damaged site. If the expenses of those actions are reasonable compared to the threat of damage or the realized damage and the benefits those actions achieved for the operator, then the party causing the damage is liable for the expenses of these actions (section 6). The compensation liability also includes any and all investigation costs necessary to complete the aforementioned actions.

Even if the act allows for piercing, it can only be applied to a narrow selection of situations within the scope of the act, but this only limits the application of the act itself; it does not prevent deriving material for the development of a general piercing doctrine.³⁰³ Section 7 and the case law surrounding it serve as a point for analogy.

Section 7

Even when the loss has not been caused deliberately or negligently, liability for compensation shall lie with a person

1) whose activity has caused the environmental damage (operator³⁰⁴);

2) who is comparable to the person carrying out the activity, as referred to in Subparagraph 1; and

3) to whom the activity that caused the environmental damage has been

302 HE 165/1992 at 3.

303 See KKO 2015:17 at 21, referring to the Act on Compensation for Environmental Damage Section 7 as one of the applicable comparison points. See also Sandvik 2011 at 853.

304 Added by the author.

assigned, if the assignee knew or should have known, at the time of the assignment, about the loss or the nuisance referred to in Section 1 or the threat of the same.

In the assessment of the comparability referred to in Paragraph 1, Subparagraph 2, due consideration shall be given to the competence of the person concerned, the financial relationship with the person carrying out the activity and the profit sought from the activity.

For the sake of simplicity and scope of the study, the damage is assumed to be governed by the Act and causality is assumed to be established. With this assumption, it becomes moot whether the compensation is for the actual damage, preventive measures or reparative measures. The only question pondered is the liable person.

The origin of the liability is not discussed. The assignee liability of Subparagraph 3 is not considered here. Subparagraph 1 places liability on the person who had formally undertaken the activity. This person’s name appears on the permits, and those physically operating the activity work for this person. Separate personality should exclude the parent corporation’s Subparagraph 1 liability for the subsidiary’s operations.³⁰⁵

Subparagraph 2 describes the formally non-liable party held liable by piercing the veil.³⁰⁶ A party comparable to the operator examines the relationship between the operator and another entity to determine whether the operator is indeed an independent party acting in its own interest.³⁰⁷ If it is not, then the veil can be pierced to hold the comparable entity liable. The relationship-justifying liability needs to exist while the damaging actions occur.³⁰⁸