NEW TRENDS IN PIERCING THE CORPORATE VEIL : THE FRENCH APPROCAH

LSCL 3 DECEMBER 2013

Stephanie Schweitzer T: +33(0)1 44 94 40 50 Stephanie.schweitzer@hfw.com

Underlying principle : "personnalité morale"

"the autonomy of moral and legal personality'"("autonomie de la personnalité morale")

"assets autonomy" ("autonomie du patrimoine")

creditors can not recover their debts on a good which does not belong to their debtors.

The liberal 'common beneficial ownership' theory The 70's trend:

French Courts relied upon the 1952 Convention which provides that "ships shall be deemed to be in the same ownership when all the shares therein are owned by the same person or persons".

Reaction to the development of single ship companies

?

X Z

A B

The liberal 'common beneficial ownership' theory

French Courts only required that there be evidence of common beneficial ownership to authorise arrest of associated vessels.

This evidence was easily admitted by the Courts

This was in contradiction with article 1832 of the Civil code on the autonomy of legal personality

Consequences of this theory: Exponential increase of litigation before the French Courts

Congestion of the French Courts

Execution of the LOU/ applicable law to the fictitiousness

The end of the liberal theory in shipping: tighter criteria

The Cour de Cassation put an end to this trend :

1994, 'Osiris I' Case 1996, 'Alexandre III' Case

Restatement of the "assets autonomy" principle

Necessity to demonstrate the fictitious or the fraudulent nature of the operating company

The end of the liberal theory in shipping: tighter criteria of company law

The claimant must prove the abuse of rights:

One or other of the owner and debtor companies is, in reality fictitious: absence of affectio societatis (i.e. intention to be involved in a partnership, in view of obtaining earning, but with the risk of contributing to losses - Cass. 3 June 1986)

Or

One or other of the owner and debtor companies is fraudulent: it has been deliberately created to avoid liability

Examples of fictitiouness

Fictitiousness / sham "Prête-noms" (front names) Façade concealing the true facts "Confusion du patrimoine" : confusion of assets Fictitious subsidiary : single ship companies

Fraud Creating a company for a deliberately dishonest purpose The fraud / impropriety as evidence of the fictitiousness of

the company

The relevant criteria for piercing the corporate veil

Evidence of substantial transfer of funds by the company to a shareholder, without consideration/compensation;

Evidence that a ship owned by one company is mortgaged as security to finance other ships in the same fleet;

The absence of general meetings, or other signs of any independent corporate existence;

One shareholder having a large majority, the others being mere nominees;

The minority of shareholders being employees of the group;

The relevant criteria for piercing the corporate veil

The creation of a "new" company (after problems have arisen) to conduct exactly the same business as the "old" company;

Same directors, same addresses, same telephone, fax and telex numbers;

The companies are registered in places where single ships companies are often established and where corporate documents are not published;

Case Law : Examples

Cour de Cassation- 15th October 2002, Latvian Shipping v/ Stocznia Gdanska "Tarangona" and "Razna"

LATVIAN

LATREEFERS

RAZNA

TARANGONA

SHIPYARDSINGLE SHIP

COMPANY

SINGLE SHIP COMPANY ORDERED 6 VESSELS

arrest

Case Law : Examples

Court of Appeal of Rennes, 23rd May 2001, Maria Maria

The 3 companies were part of the same group All 3 were Liberian companies with the same registered address None of the companies had the obligation to file annual tax returns or

disclose the names of their directors/shareholders. All 3 had the same directors The issued share capital was divided into bearer shares which were held by

one physical person who was known to be an intermediary (he was an employee of the International Trust Code of Liberia)

The accounts disclosed by the ship owning companies were not certified. the mortgages on each of the 2 vessels were in favour of the same bank

and each answered for the debts of the other to the same bank.

Remedies

Nullity of the company ("action en nullité") / ("action en simulation")

Possibility to attach the assets of the controllers/beneficial owners

Extension of bankrupcy proceedings

Further remedies in case of fraud : Criminal offence : swindle … "Action paulienne"

Conclusion

The French principle of "assets' autonomy" is strongly reaffirmed by the French Courts.

Current reluctance to admit the fictitious or the fraudulent nature of a company

However, piercing the corporate veil is still possible on certain conditions.

Lawyers for international commercehfw.com