“Piercing of the corporate veil” in private law of the Republic of Kazakhstan (“RoK”)

April 15, 2015

The judicial practice is full of different cases: claimant seeks enforcement of execution of contract by a defender or extension of contract duration for performance etc.

Among them, the most interesting are those, when affiliated companies and (or) participants of a company are joined to the litigation as co-defendant.  There is a case in our practice, when a court attached property of one limited liability partnership (“LLP”) as it was a participant and accordingly has a participating interest in an LLP, which is joined as defendant to the litigation process.  We cannot say that such judgements common and frequent, however, there are such cases in practice. Besides this, by virtue of recent amendments into the Kazakhstani laws  aimed at “drastic improvement of conditions of entrepreneurial activity in the Republic of Kazakhstan”[1], in the very near time one can encounter the problem of liability of participants of an LLP and (or) affiliated persons for damages and losses caused by LLP.

In special literature and foreign judicial practice, doctrine of indemnity of “limited liability legal entity” against liability is commonly referred to as modern term “piercing of the corporate veil”[2].  Kazakhstani laws contain certain provisions for applying this doctrine, for instance, Article 8 (5) of Civil Code of the RoK (“Code”) – prohibition of abuse of rights; Article 95 of the Code – liability of a mother organization for transactions of its subsidiary (daughter company); liability of participants (shareholders) of a legal entity in case of intentional bankruptcy of the entity.  However, in these circumstances a participant (shareholder) can be held liable strictly subject to hard proof that a legal entity becomes liable through fault of its participant (shareholder). Meanwhile the provision on prohibition of abusing rights should be applied in addition to the basic evidences, otherwise lawyers will refer to Article 8 (5) Civil Code almost in each commercial dispute.  In regards of participants (shareholders) of a legal entity, the doctrine piercing of corporate veil should be limited with certain situations subject to hard proof of fault of participants (shareholders) and by virtue of direct reference to the law.

As to the liability of affiliated companies, the way the things are going is completely different. The laws do not stipulate liability of affiliated companies for any activity of a legal entity-defendant, thereby the doctrine of “piercing of corporate veil” can be applied in relation of affiliated companies subject to relevant amendments into the laws of the RoK.  In my view, currently this doctrine could be allowed to be applied and enforced only when a legal entity uses a brand (firm name or a trademark (logo)) of its affiliated company. In particular, it is quite often when some construction projects are being advertised under a popular and well-known brand and when it comes time to sign agreement for purchase of constructing immovable property (office premises or apartments) with a project developer, it appears that the project developer is another company and its name is not connected with a well-known brand.

Meanwhile the developer’s clients (moreover consumers) do not have to check solvency and competence of the developer, as under Article 8 (4) of the Code its good faith is assumed.  As the developer uses a well-known brand name[3], when the developer has any problems, its affiliated persons that own such brand or which are operating companies actually performing activity under the same brand, shall be liable for any issue arisen with the developer.

In general, the doctrine of “piercing of the corporate veil” can be generally applied only as the last measure for court to take a fair decision, otherwise, the meaning of concept of “limited liability of a legal entity” is being lost.

That is to say one should use another measures, stipulated by the laws and take all precaution measures to prevent necessity to apply doctrine of “piercing of the corporate veil”, e.g. to establish a requirement to form a charter capital of  a larger amount for an LLP[4], to develop other forms of commercial legal entities as kommandit partnership (kind of partnership in which limited and full liability are unequally distributed among participants), full partnership by way of establishing  additional subsidies, privileges and essential state support for them.

[1] According to the mentioned amendments, inter alia, LLP could have charter capital in amount of 0 tenge.

[2] The doctrine of “piercing of the corporate veil” is used in public areas of Kazakhstan legislation, for instance, in case of regulation of one-day companies and collection of taxes, however, hereby mentioned matter is researched in frame of private law. It should be noted, that the definitions “removal of the corporate cover” and “lifting of the corporate veil” are used in Russia as well.

[3] It is considering cases of legal usage of the brand, for instance, developer is member of the same group of companies with brand owner

[4] As option, the amount of charter capital could depend on category of entrepreneurial entity (small, middle and large entities).

Yersultan Mussaliyev