Colombia: Lifting The Corporate Veil: Partner's Liability For Activities Of The Company

Last Updated: 4 March 1999
María Paula Valdés of Parra, Rodríguez, Cavelier explains application under Colombian law of lifting of the corporate veil.

The theory of lifting of the corporate veil emerged from the necessity of legal systems to control abuse of protection offered by the corporate veil by partners of companies. Various legal systems started to regulate this procedure, establish its scope and to identify its consequences. Colombian law is also part of this process; the current status is under review in this article.

When individuals decide to incorporate a company, a legal entity is born, other than the partners considered individually, after all legal formalities required have been fulfilled. As a result, the actions carried out by the company bind the company as such, independently from its partners. The execution of contracts, opening of accounts, or compliance with obligations are actions performed in the company's name and not that of its partners.

This situation of independent liability, known as 'corporate veil', has been used by partners to perform fraudulent acts, under the protection of the legal personality of the company. In fact, when the company performs non-permitted activities the partners are protected against the results derived therefrom precisely by the existence of the corporate "veil".

Therefore, a theory has emerged, under which, when the formal structure of the legal entity is used for fraudulent purposes, competent authorities may disregard its legal personality, lift the corporate veil and place responsibility for actions of the company on its partners.

The above theory is also applied in cases of company or entrepreneurial groups, wherein a parent or controlling company is in charge of directing the group, and subordinate companies' operations are subject to the decisions made by the parent or controlling company. These situations may appear through three different circumstances, such as, the purchase of a majority of shares, parts and portions of equity, of one company by another, thus obtaining control over said company.

Therefore, we may be facing economic conglomerates comprising a multiplicity of subordinate companies, directed or controlled by a parent or controlling company.

Several benefits may be derived from this type of organisation, which, among others, guarantee: (i) a larger presence in the market and a better position in face of competition (when companies belong to the same line of business), (ii) a greater profitability and reliability in the supply of goods necessary for the activities carried out (where companies form production or distribution chains); and (iii) risk diversification by virtue of the theory of limited liability, inasmuch as, when certain companies belonging to the group confront financial difficulties, this does not affect the remaining companies that are part of the same group.

However, the risk of abuse of this type of organisations exists, and more specifically, of abuse of the control situation to the detriment of third parties and minority shareholders.

That is why the possibility of shifting the responsibility to the parent or controlling company has been developed for actions carried out by its subordinates. Thereby, the corporate veil of the subordinate company is pierced until the parent company is reached.

The above theory, which covers the two stated premises, originates in the United States (under the name: "The piercing or lifting of the corporate veil"), is adopted afterwards in England and has currently found wide acceptance amongst theoreticians and jurisprudence scholars in France (known as "La leveé du vœile de la personalité morale"), Spain and presently in Colombia (known as "Levantamiento del Velo Corporativo o Desconocimiento de la Personalidad Jurídica"), amongst others.

If you are interested in obtaining more details on the application of this theory under Colombian law, please send us a message to the following e-mail address and we will send you a comprehensive document.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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