Legal Updates

A shareholder who acted as a “straw man” for another person may be personally liable for the company debt

June 30, 2024

Goods worth over one million euros were ordered from a company, but the company did not deliver the goods and did not refund the customer. The shareholder and his spouse, who was the actual "living spirit" behing the company, were demanded to repay the funds personally although the shareholder contended that he is recorded as a shareholder but the shares are in fact his spouse’s.

The Court accepted the claim against the shareholder and ordered him to refund the money personally by virtue of the principle of piercing the corporate veil, but rejected the claim against the spouse who served as an officer in the company. A Court may pierce the corporate veil and attribute a company debt to its shareholder in exceptional cases, inter alia, when the company is misused to defraud a person or deprive a creditor. Also, an organ or officer in the company may be personally liable to a third party for an act or omission it did as an organ or an officer in the company, if it breached the duty of care imposed on it. For the duty of care of an organ in the company towards a third party, one needs to show beyond the normal and routine activities of an official in the company. In this case, the company continued and received orders, in the high sums of hundreds of thousands of Euros, while knowing that it has no intention, and is unable, to order goods against such orders. The shareholder actually served as a "straw man" for his spouse, who actually steered the management of the company and was not recorded as a formal shareholder only due to her problematic financial situation. Also, the funds received in the company were actually used to cover past debts of the shareholder's spouse who was on the verge of bankruptcy. Therefore, this is an exceptional case in which the corporate veil was misused by the shareholder and there is a reason to hold the shareholder personally accountable for the company debt. Despite this, because the relationship between the customer and the spouse, as a company official, was short and did not deviate from the normal and routine activity, she does not owe a duty of care to the customer and will not be personally liable.