As a general rule, a company is recognised in law as a separate legal person, distinct from its shareholders and directors. This means that the company itself can own assets, enter into contracts, and sue or be sued in its own name.
This principle of separate legal personality, established in Salomon v A Salomon & Co [1897], underpins the concept of limited liability. In most cases, shareholders are liable for the company’s debts only up to any unpaid amount on their shares.
That protection, however, is not absolute. Cyprus courts apply a high threshold and are generally reluctant to depart from the principle of separate legal personality. Nevertheless, in exceptional and fact-specific circumstances, the corporate veil may be lifted.
What does “lifting the corporate veil” mean?
Lifting of the corporate veil refers to the exceptional situation in which the principle of separate legal personality is disregarded and shareholders and directors may face personal liability for the company’s acts or omissions.
This may arise under specific statutory provisions or in limited judicial circumstances, where court intervention is required to prevent abuse of the corporate form and to ensure that incorporation is not used to facilitate wrongdoing, fraud, or the improper avoidance of liability.
It is not a general remedy, and the courts will not disregard incorporation merely because doing so would be convenient, or because a company is closely held. The doctrine is applied narrowly and only where the facts justify intervention.
When have Cyprus courts lifted the corporate veil?
Cyprus courts have accepted the lifting of the corporate veil in limited and fact-specific circumstances, including, for example, where:
· a company is used as a sham, façade or “front” to conceal wrongdoing or improper conduct;
· a company is used to evade or avoid existing legal obligations or liabilities;
· a company is incorporated to acquire the assets and business activities of another company with the same shareholders, with the purpose of avoiding payment to judgment creditors;
· in a group structure, a subsidiary is found on the facts to operate as a mere agent or instrumentality of the parent company, justifying departure from strict corporate separateness for the purposes of the particular dispute;
· a company seeks to undermine the confidentiality of tender procedures and distort free competition.
Statutory instances of veil lifting
The Cyprus Companies Law, Cap. 113 contains specific provisions under which personal liability may arise, including the following:
1. Fraudulent trading (section 311)
In the course of a winding-up, where the business of a company has been carried on with intent to defraud creditors, or for any fraudulent purpose, the court may declare that any person who was knowingly a party to that conduct is personally responsible, without limitation, for all or part of the company’s debts, as the court may direct.
2. Reduction of public company members below minimum (section 32)
If the number of members of a public company falls below the statutory minimum and the company continues to trade for more than six months, those members who remain during that period may become personally liable for debts incurred during that time.
3. Company name on documents & negotiable instruments (section 103)
Failure to include the company’s prescribed particulars on certain documents may result in penalties and, in some cases, may expose the responsible officer to personal liability to the holder of a negotiable instrument issued without the required company name or details.
4. Other instances of statutory intervention
Limitations on limited liability, or outcomes analogous to veil lifting, may also arise under other legislative regimes, including tax, insolvency and anti-money laundering laws..
How Can Bybloserve Management Assist You?
Understanding when limited liability may be challenged is important for shareholders, directors and group structures alike. Bybloserve Management can assist clients in identifying governance, structuring and compliance issues that may increase exposure to personal liability, and in coordinating with legal and other professional advisers where specific advice is required.
For further information, please contact us at info@bybloserve.com
Disclaimer: This publication is provided for general information purposes only and does not constitute legal, tax, accounting or other professional advice. The application of the law depends on the specific facts of each case, and the legal position may change over time. You should not act or refrain from acting on the basis of this publication without obtaining appropriate professional advice. No liability is accepted for any loss arising from reliance on this publication. Nothing in this publication creates a client, advisory, fiduciary or professional relationship.