Company Act Liability for Damages

Company Act 22:1 seems applicable in this case also. One person acted as the entire management in both corporations. He was obligated by the Company Act regulation as well as the duty of care. Were these violated at any point? Potentially and likely they were. The staff company operated at a loss through the entirety of its existence, which suggests that the pricing set between the corporations was not at market value. If the pricing was not at market value, then every transaction between the asset corporation and the staff corporation would constitute a distribution of assets. These distributions would have been unlawful, as they do not provide assets for the shareholders but for the other corporation (Company Act 13:1).⁴⁸⁶ Naturally, if the transactions had a business reason, then they were not unlawful distribution.

No evidence of any of these aspects is present in the documents.

However, the logistics services market is extremely competitive, so it is possible that the staff renting services were at market value as set by the competition. It would be extremely difficult to determine what the correct market price was, but it is clear that the asset corporation was able to turn a profit in the highly competitive market. The management’s claims about the staff corporation being able to meet its obligations could be true. All the materials reveal is that the corporation was operated at a loss. It is clear, then, that the pricing did not allow the corporation to turn a profit or even cover its expenses. Additional funding was needed to pay the wages. There is no information in the materials as to where that funding came from. With this fact, the case is similar to NJA 2014 s. 877. The corporation in that arrangement was founded to manage a court case. The corporation received exactly the amount of funds needed to pay for its expenses relating to the case, but not enough to cover the legal expenses of the opposing party in case the trial was lost. The running expenses were covered by external sources of funding, but the corporation could be abandoned should the looming risk of greater expenses ever materialize. If the funds to pay wages in the KKO 2017:94 case came from the asset corporation, the situation is exactly alike and supports piercing.

One additional problem still appears with the market value consideration. The corporation’s ability to turn a profit with their pricing does not tell anything about the market value. Market value is simply the price at which independent market

486 Unless the shareholders unanimously agreed to the procedure.

actors agree to buy and sell the services. It is thus entirely possible that the staff company in the case simply could not compete and was destined to fail eventually.

Another problem with applying unlawful distribution is that market value assumes unrelated at-arm’s-length parties that form the price through negotiation.

In this case, the two corporations were closely linked through ownership and the owner was able to manipulate the contractual relations between these corporations.

Obviously, the opportunity to deviate from market value was present. Yet it could be argued that the asset corporation likely would not have terminated the contractual relationship had the staff corporation hiked its rates. The two were not competitive in that matter, as both could rely on the continuation of the patronage. Normal risks and incentive to compete with pricing simply did not exist in the situation. Even if the market value is determined by adjusting for these factors, it does not create the obligation to generate profit in both companies. Bad business is not forbidden.

This setting does raise the question, though, as to how it is even possible to assess violations of the duty of care of the management here.

As the same person managed both corporations and was responsible for their contractual relationships, it seems likely that he would have been able to determine the division of benefits between the corporations. Thus, he would have known that the contract would be unprofitable for the staff corporation. This, in turn, would demand an explanation and justification per the business judgment rule.

If he acted as per the purpose of separating benefits and risks, then making these contracts would always constitute a violation of the duty of care. Although running a business is complex and, even if one can unanimously determine the contractual terms and price, many other things could affect the profitability of the business.

Being able to manipulate the contracts only shows that the opportunity was present and that liability would require some proof of the intentions and purposes behind the management’s actions. Naturally, the purpose of the arrangement was not that obvious and needed to be determined in the court proceeding itself. The director/

shareholder naturally denied this purpose through the entirety of the trial. It would seem, though, that liability in damages based on the violation of the duty of care could have served as an alternative to the piercing claim, although that claim, unlike piercing, could have only been made by the bankruptcy estate or a creditor on its behalf and for the benefit of the estate. The liable party would also deviate from the piercing claim as would the amount of claimable damages.

Additionally, no prohibition exists to operate the business at a loss. To avoid bankruptcy, the losses need to be covered somehow, by either price hikes or capital injections. Bankruptcies are a normal part of the market economy—the more efficient enterprise is able to price out the others. As such, we cannot really discern any information on the market value pricing from the profitability of a single corporation. However, neglecting to set the prices high enough to generate profit for the shareholders might constitute a violation of the duty of care set for

directors.⁴⁸⁷ In that case, the court would have to determine whether the business judgment rule’s requirements on the decision procedure were met. The documents provide no material to assess the decision-making.

For the Company Act 22:1 liability for damages to materialize, one would need to prove unlawful distribution or violation of the duty of care. Regardless of the route chosen, the end result is a compensation for the company, divided per capita between the creditors through the bankruptcy estate. This would thus constitute a collective benefit instead of the individual benefit potentially achievable via piercing. As Company Act 22:1 is a damage compensation norm, it would not allow for recovering the full claim of the creditor. Instead, only the damage caused by the management is compensated. This issue was already discussed in chapter 1.2.3., so I will not repeat the arguments here.

3.4. Debtor’s Dishonesty

The alternative elements of debtor’s dishonesty that are potentially applicable in this case are that it “gives away or otherwise surrenders his or her property without acceptable reason” and “increases his or her liabilities without basis.” Unlawful distribution was discussed in the previous section. The same difficulties as with the unlawful distribution part exist here. What is the market value and were there deviations from it? As noted earlier, no evidence of this sort of behavior is provided.

Naturally, giving away or surrendering property can be done in ways other than unlawful distribution, though nothing in the case hints toward this.

As for the increase in liabilities without a basis, an argument exists that neglecting the taxes and employer fees would increase the liabilities. It no doubt creates liabilities and eventually leads to the inability to fulfill obligations in a timely manner. However, as those fees are derived from the business and its core functions, accumulating such liabilities are hardly without a basis. They are an automatic consequence of conducting the business. Neglecting to pay these fees is not increasing liabilities but simply neglecting them. The neglected amounts are temporarily available to the corporation before the authorities demand payment. How these “forcibly borrowed”

resources are used can be criminal. Simply neglecting payments is also criminal, but not as a debtor’s dishonesty. There are no indicators in the case material of any criminal uses. On the other hand, the shareholder of the corporations had claimed that the neglected payments accumulated after the contract with Itella fell apart.

If this is the case, then a genuine crisis and eventually bankruptcy was the cause of neglect. It seems plausible that in such a situation, the corporation was simply unable to pay since no resources existed.

487 See also KKO 2003:33 and V.6.2. of this work.

Debtor’s dishonesty also requires insolvency. The transfers of property need to cause or essentially worsen the insolvency. The staff corporation was operated at a loss, though it was able to operate. There are no indications that the company could not meet its obligations as they become due. The employees’ claims in the THO 1070 case were contested and uncertain. The pay security authority’s claim only covered the last three months before bankruptcy. It is also doubtful in this regard that the conduct described would meet the elements of debtor’s dishonesty.

3.5. Asset Recovery

The Asset Recovery Act Section 10 would allow for reversing any payment on a loan made three months before bankruptcy if the payment was made with an unusual method or before the expiration date or if it was disproportionally large when compared to the assets of the debtor. There are no indicators in the material on any of these elements. Section 5 of the act allows reversing any legal action that has favored one creditor over others, has transferred assets away from the debtor to the detriment of the creditors or has added liabilities to the detriment of the creditors.

The application of Section 5 requires the debtor to have been insolvent during the time the legal action was made. This raises the same problem as discussed before in the context of dishonesty by a debtor.

The Asset Recovery Act Section 3 names the following as close parties to each other: all corporations with which a person through shareholding or other economic relation has a significant unison of interests, as well as any close party of the person.

Since both the asset corporation and the staff corporation were fully owned by a single person, that person was a close party to both corporations. This connection through the owner makes the two corporations close parties.

The close party status allows different, more creditor-friendly treatments. It enables reversing transactions made over five years before the insolvency proceedings began.

Other than that, it allows utilizing the assumption of a gratuitous transaction from Section 8. Any transfer of assets from the debtor to the close party that was made without counter value or the value the debtor receives is disproportionately small compared to the given assets and is assumed a gift. Gifts, in turn, are reversible by Section 6 of the act. This returns us to the same analysis as the unlawful distribution and dishonesty by the debtor were the contractual relations between the asset and staff corporations made at market value. As discussed above, this evaluation is not possible within this research. As for other transactions between these companies, there is no evidence of any. Thus, the application of asset recovery would need to rely on the pricing of the employee rental contracts.

The same disadvantages exist as with the debtor’s dishonesty and Company Act liability for damages. The resulting compensation or return of assets befall the

bankruptcy estate and, through it, to the creditors collectively. It does not serve the individual interest of the creditor itself, at least not in full.

4. Conclusions

In this chapter, I have examined the existing significant piercing cases to determine whether a satisfactory result could have been obtained through less controversial legal doctrines. The answer is a sound negative. Existing legal doctrines of liability in damages, criminal liability and asset recovery target different sorts of conduct and offer a different remedy to the situation. The findings somewhat repeat what was discovered in chapter III that sought to derive some analogy from these doctrines to develop the veil piercing doctrine. Some key differences exist, making it apparent that the doctrines are norms directed toward different sorts of conduct.

Tort liability seeks to compensate the damage one has caused by acting in a condemnable manner. The nature of condemnable actions makes this doctrine ill-suited for corporate arrangement situations. Founding a corporate arrangement is always according to the wording of the law, and the limitation of liability is always inherent in founding the corporation. This, combined with the especially weighty reasons required to compensate economic loss, make it undesirable to apply liability in damages to damages caused by founding a corporate arrangement. Such application would simply require many concessions to the doctrine of liability for damages. If the result were to be this controversial, it is better to make the exception as narrow as possible, thus creating a veil piercing doctrine that resembles liability in damages.

Company Act liability in damages, debtor’s dishonesty and asset recovery all seem to boil down to the same question of whether the transactions between the companies had a business purpose and whether they were made at market value.

They are tightly tied to transactions and their fairness. Creating the corporate arrangement predates the corporate transactions, however. The arrangement can be crafted to create a situation violating the creditors’ right entirely without making these unfair transactions. This takes traditional approaches to creditor protection and renders them powerless.

The examined doctrines greatly differ in the type of remedy they offer. With tort liability, one seeks to determine the amount of damage caused and compensates that amount. The person liable is the one causing the damage, not the one benefiting from the action. Debtor’s dishonesty allows claiming damages, and thus, the remedy is the same in criminal liability situations. The one who committed the crime is held liable. Similarly, Company Act liability holds liable the one who, in their role within the corporation, does not fulfill their duties, which causes damage to the company.

It is also important to note an additional limitation: that the parties able to claim

Company Act liability are the corporation itself and the bankruptcy estate.⁴⁸⁸ Similarly, asset recovery is a remedy available for the bankruptcy estate and creditors in an insolvency proceeding. Debtor’s dishonesty, on the other hand, requires the involvement of the police and prosecution. Veil piercing is a civil law claim and can be made by anyone who has suffered any damage from the arrangement. Veil piercing is like liability in damages as it is claimant-specific, e.g., the one suffering the damage can make the claim and gets awarded the remedy. Where piercing differs from liability in damages is the liable party. In this regard, veil piercing seems to resemble restoration. The arrangement is “cancelled” or disregarded, and the parties are granted rights as they would have been without the unfair arrangement.

From this analysis, we can deduce two definite limitations for veil piercing. The first elimination will be the transactions. There are several provisions in law meant to safeguard the assets and limit their transfer. Veil piercing needs not be one of those doctrines, and case law is unanimous on this thus far. Naturally, the transfers are likely to matter, as I will discuss in V.6.2 and V.6.5. of this work. They are used to siphon the corporation, and sometimes this is relevant in piercing.

The second piece of interest we find regards the tort doctrine. Depending on the case, the tort doctrine could apply if concessions were made, or it may not apply at all. Veil piercing cases have derived from tort doctrine mostly in regards to causality, though. There has been no explicit requirement to show the connection of cause and consequence; adopting one would not be of major importance, as case law has shown that damage in piercing situations is caused by using the corporate form.

Limited liability, in turn, means that every time a corporate form is used and some relevant negative risk realizes, the incorporators likely benefit at the expense of some party. This is the accepted main function of the corporation. As such, we cannot place this sort of causality into the center of piercing doctrine. That would mean the end of limited liability. I will not kill limited liability here but will deduce a piercing doctrine that is capable of actually discerning the relevant conduct.

Although the discussion here has been brief, I feel it necessary to crystallize these findings even further:

1. Veil piercing does not target transactions.

2. Veil piercing requires a special kind of loose causality between corporate use and damage that is almost always present, and thus, no high significance should be given to it.

488 Usually like this, though the law allows shareholders and creditors to make the claim. These situ-ations are rare since it is unlikely that these parties are damaged through the actions sanctioned in the Company Act 22:1 liability norm.

V DEVELOPING THE DOCTRINE