Piercing the Corporate Veil in Switzerland

Based on Swiss jurisprudence, piercing the corporate veil refers to the liability of a third party for the obligations of a debtor with whom it is economically identical, even though they are fundamentally two separate legal entities with separate assets (BGE 144 III 541 consideration 8.3.1).

Swiss law (lege lata) does not expressly provide for piercing the corporate veil. However, case law allows piercing the corporate veil (restrictively) under certain circumstances (BGE 144 III 541 consideration 8.3.1 with references).

One cannot unreservedly invoke the formal existence of two legally separate persons if all or almost all of the assets of a legal entity belong either directly or through intermediaries to the same natural or legal person (see entire paragraph: BGE 144 III 541 consideration 8.3.1). Despite the formal duality of the entities, there are not two independent entities, as the legal entity is merely an instrument in the hands of its founder or controller, with whom it is economically one and the same. It can be assumed that, in accordance with economic reality, there is a legal identity and that the legal relationships binding one person also bind the other. This binding relationship arises when invoking the difference between the subjects constitutes an abuse of law, in particular through

• Circumvention of the law;
• Breach of contract, or;
• Unlawful infringement of the interests of a third party.

These three circumstances can best be identified as case groups.

Incidentally, case law also states that cases constituting an abuse of rights are difficult to generalise (for the entire paragraph: BGE 144 III 541 consideration 8.3.2 with references). Case law and doctrine proceed on the basis of circumstantial evidence. The most common case is one in which the debtor improperly transfers his assets to a company controlled by him, with which he forms an economic unit, in order to withdraw assets from the reach of his creditors.

It is worth noting that Swiss law holds persons acting on behalf of legal entities liable, particularly in criminal law (art. 102 Swiss Criminal Code e contrario in conjunction with substantive offences such as art. 158 Swiss Criminal Code or art. 163 ff. Swiss Criminal Code) and in commercial law for the establishment (e.g., art. 753 Swiss Code of Obligations), administration, management, liquidation (e.g., art. 55 para. 3 Swiss Civil Code, art. 754 Swiss Code of Obligations) audit of the legal entity (e.g. art. 755 Swiss Code of Obligations) and for unjustified payments (e.g., art. 678 subsequent Swiss Code of Obligations).

The term ‘corporate contract’ refers to the articles of association of a legal entity (e.g., art. 626 Swiss Code of Obligations), but not to any contract relating to the formation of the legal entity or shareholder agreement.

A legal entity acquires personality rights through entry in the commercial register (e.g., art. 643 para. 1 Swiss Code of Obligations). It acquires legal personality through registration even if the requirements for registration were not actually met (e.g., art. 643 para. 2 Swiss Code of Obligations). In this respect, the formal requirements for establishment can be understood as non-constitutive regulatory provisions.

However, the above is subject to practical and legal restrictions, as the articles of association are checked by a notary (e.g., art. 629 para. 1 Swiss Code of Obligations) at the time of incorporation and by the commercial register authorities (art. 937 Swiss Code of Obligations) at the time of entry in the commercial register. If they find that the requirements have not been met, they request that the necessary corrections be made.

If registration nevertheless takes place, and if legal or statutory provisions have been disregarded during the formation of the company, thereby significantly jeopardising or infringing the interests of creditors or shareholders, the court may, at the request of such creditors or shareholders, order the dissolution of the company (e.g., art. 643 Swiss Code of Obligations).

The prerequisites for intervention within the meaning of the explanations given in section 1 above are the following (BGE 144 III 541 consideration 8.3.2 with references):

• an economic identity of the persons or at least the economic control of one legal entity over the other;
• an abusive assertion of duality in order to gain an unjustified advantage.

An abusive assertion of duality exists if the duality of legal entities is asserted solely for the purpose of abusively evading enforcement (for the entire paragraph: BGE 144 III 541 consideration 8.3.1 with references).

According to established case law, the establishment of the legal entity itself does not have to pursue abusive objectives. It is sufficient that the legal entity is used abusively or invokes legal duality abusively in order to avoid fulfilling legal or contractual obligations. There must also be an accumulation of various and unusual behaviours that result in machinations and a qualified interference with the rights of a third party.

The foregoing confirms the concept of abuse of legal personality in Swiss law, particularly in case law.

Based on the explanations provided in sections 1 and 3 above, piercing the corporate veil in Switzerland can be understood as a response to an abuse of legal personality. According to case law, such an abuse of rights is a mandatory prerequisite for piercing the corporate veil.

However, a piercing principle is not apparent in Swiss law. Piercing is rather the exception and is only considered in exceptional cases (BGE 145 III 351 E. 4.2).

The term ‘corporate shield’ means that a legal entity is solely liable for itself and not its shareholders.

Swiss commercial law knows a numerus clausus for companies. While certain legal forms do not require shareholders to make any contribution other than their capital contribution (e.g., public limited companies, art. 620 para. 2 Swiss Code of Obligations), others allow for more extensive liability (e.g., limited liability companies, art. 772 para. 2 Swiss Code of Obligations), and in others, liability is even mandatory (e.g., in the case of limited partnerships, art. 594 para. 1 and para. 2 Swiss Code of Obligations).

As already explained, even in the case of legal entities that do not provide for shareholder liability, there is the possibility of piercing the corporate veil. Therefore, there can be no question of the unconditional recognition of a “corporate shield” in Swiss commercial law.

In order to free themselves from their personal debts and obligations, shareholders must first transfer these away from themselves (and, if necessary, to the legal entity in question), establish future personal debts and obligations with the legal entity in question (or with a third party), or shield their assets with such an entity.

As already mentioned, the most common case of abuse of rights in the context of piercing the corporate veil is where the debtor improperly transfers his assets to a company controlled by him, with which he forms an economic unit, in order to shield assets from creditors.

Provided that the conditions set out in section 3 above are met, it is possible to pierce the corporate veil of a legal entity and reach the shareholders behind it.

Whether the ‘corporate shield’ applies to those shareholders who use their (limited) liability as shareholders solely to free themselves from their personal debts and obligations therefore depends on whether the conditions for piercing the corporate veil are met. As already explained, piercing the corporate veil is only considered in exceptional cases (BGE 145 III 351 consideration 4.2).

In principle, shareholders are free to pursue their own interests through their participation in a legal entity, in accordance with the principle of private autonomy under Swiss private law. Accordingly, they are also free to exercise their rights at shareholders' meetings (e.g., art. 689 para. 1 Swiss Code of Obligations), particularly when appointing the organs of the legal entity.

On the other hand, it is the bodies, in particular the board of directors, as well as third parties involved in the management of the company, must perform their duties with due care and act in good faith in the interests of the legal entity (e.g., art. 717 Swiss Code of Obligations). They must treat shareholders equally under the same conditions (e.g., art. 717 para. 2 Swiss Code of Obligations).

However, resolutions of the shareholders' meeting that violate the law or the articles of association may be challenged by the board of directors and any shareholder in court by bringing an action against the legal entity (e.g., art. 706 para. 1 Swiss Code of Obligations).

It is the legal entity that is liable for damage resulting from unlawful acts committed by a person authorised to manage or represent the company in the course of their business activities (e.g., art. 722 Swiss Code of Obligations).

The persons acting are also personally liable for their negligence (art. 55 para. 3 of the Swiss Civil Code). In this regard, reference should also be made to the comments in section 1 (last paragraph) above.

Who can be prosecuted as an organ of a legal entity is not determined solely on the basis of formal criteria, but also on whether the person in question has made decisions reserved to organs or has been responsible for the actual management of the company and, thus, has had a decisive influence on the formation of the company's will (so-called de facto organ; BGE 114 V 213, abstract and consideration 4e).

In conclusion, Swiss law provides a differentiated set of criminal and civil law intervention and liability instruments in the event of unlawful pursuit of personal interests by shareholders. The use of these instruments must be considered on a case-by-case basis – with regard to the respective instrument, the facts of the case, the parties involved and the legal consequences. It should be noted that the passive legitimacy of the instruments is generally not linked to the status as a shareholder, but rather to decisions of the legal entity and the actions (or omissions) of its organs and the persons acting on their behalf.

As seen above, the intervention and liability instruments of Swiss law do not generally link potentially unlawful acts by a legal entity to the status of shareholder.

The capital of the legal entity should serve to protect creditors as a basis for liability. In this regard, there are minimum capital requirements (e.g., art. 621 para. 1 Swiss Code of Obligations, art. 632 Swiss Code of Obligations).

The capital is further strengthened by profit allocation requirements (e.g., art. 672 para. 2 Swiss Code of Obligations) and protected against erosion (e.g., art. 675 para. 2 and para. 3 Swiss Code of Obligations).

Further, commercial law provides for reimbursement in the event of unjustified payments to shareholders, members of governing bodies and related parties (e.g., art. 678 para. 1 Swiss Code of Obligations) as well as additional payment obligations (e.g., art. 772 para. 2 Swiss Code of Obligations).

In the event of imminent insolvency, capital loss and over-indebtedness, the board of directors, or alternatively the auditor, is required to take measures with due urgency (art. 725 ff. Swiss Code of Obligations).

In the event of deficiencies in the organisation of a legal entity, shareholders and creditors (e.g., art. 731b Swiss Code of Obligations) as well as the commercial register authorities are given further instruments of intervention (art. 939 Swiss Code of Obligations).

Finally, the aforementioned criminal and commercial law liability provisions (comments in section 1 (last paragraph) above) and enforcement law provisions (art. 285 subsequent of the Swiss Federal Act on Debt Collection and Bankruptcy) also apply in favour of creditors who are partially entitled to take legal action (e.g., art. 757 Swiss Code of Obligations).

Swiss law recognises both the concept of beneficial owner (e.g., art. 697j ff. Swiss Code of Obligations) and that of de facto organ.

The beneficial owner may be indirectly affected by insolvency, namely in the event of bankruptcy of the legal entity (art. 159 ff. Swiss Federal Act on Debt Collection and Bankruptcy). If applicable, the respective shareholder is directly affected first. Depending on the relationship between the shareholder and the beneficial owner, the impact may be transferred to the latter.

As already explained, a de facto (or material) organ becomes responsible/liable in the same way as a formal organ if the person in question has made decisions reserved for organs or has been responsible for the actual management of the company and has, thus, had a decisive influence on the company's decision-making process (BGE 114 V 213, abstract and consideration 4e; Vogel/Rebell, p. 17). The treatment of a de facto organ in the event of the insolvency of the legal entity therefore corresponds to the treatment of a formal organ. Reference can be made to the comments in section 1, 7 and 8 above.

Swiss law does not recognise group law. It only recognises individual provisions that regulate specific aspects of group relationships (e.g., art. 963 Swiss Code of Obligations). The group does not have its own legal personality (Vogel/Rebell, p. 7). The individual companies of the group act externally (Vogel/Rebell, p. 7). In principle, controlled companies (or subsidiaries) that are subject to uniform economic management can invoke their legal independence from the controlling company (or parent company) (BGE 137 III 550 consideration 2.3.1 with reference).

However, the corporate veil may be pierced and economic identity with the controlling company asserted in the sense of piercing the corporate veil, if asserting the legal independence of the two entities constitutes an abuse of law (Art. 2 of the Swiss Civil Code; BGE 137 III 550 consideration 2.3.1 with reference).

According to Federal Supreme Court case law, there is no piercing in the true sense of the word if the spheres of the controlling and controlled companies merge or if the controlling company is already liable on its own legal basis (for the entire paragraph: BGE 137 III 550 consideration 2.3.1 and consideration 2.3.2 with references; BGE 120 II 331 consideration 5a). An obligation on the part of the controlling company arises, for example, if it disappoints the trust of third parties or if declarations of intent are attributed to it. In these cases, it is not the independence of the legal entities that is negated, but exclusively their active or passive legitimacy: the controlling company is not legitimised and obligated in place of the controlled company, but alongside it.

The foregoing may lead to piercing the corporate veil in the relationship between a controlled and a controlling legal entity, and in some cases also to supplementary liability without piercing the corporate veil.

Practical Guidance and the Need for Advice

Swiss law (basically through case law) takes a differentiated approach to weighing up the privileges and liabilities of persons behind a legal entity. In practice, the following aspects must particularly be taken into account:

• Manage legal entities in good faith and with due care: The bodies and third parties involved in the management of a legal entity shall protect its interests in good faith and perform their duties with due care.
• Respect different roles and interests: In the event of conflicting roles or interests, those involved in the management of a legal entity shall protect its interests or recuse themselves.
• Avoid abuse: Shareholders and management of a legal entity shall not use it in an abusive manner.
• Act in an informed manner: Shareholders and management of a legal entity shall understand the concept, scope and limits of the legal entity and of individual transactions, insofar as they are involved in them.

Questions arising in practice must be assessed on a case-by-case basis. Shareholders with significant holdings and persons involved in the management of a legal entity in the broad sense rely on relevant professional expertise in their own interests and those of the legal entity.