IS LIMITED LIABILITY ALWAYS "LIMITED"?
The Supreme Court of Georgia issued a landmark decision in 2015 (case #as-1307-1245-2014, case #as-1158-1104-2014) defining the scope of personal liability of the shareholders and the directors of a company. The decision is important because it discusses the doctrine of piercing the corporate veil and interprets one of the core fiduciary duties - the duty of care.
Tamara Tkeshelashvili and Mariam Antia,
lawyers at Mgaloblishvili Kipiani Dzidziguri (MKD) law firm
Piercing the Corporate Veil
The Supreme Court ruled that the grounds for liability of shareholders and directors are inherently different, given their distinct status.
According to the Supreme Court, shareholders may be held personally liable (the corporate veil may be pierced), based on article 3.6 of the Law of Georgia on Entrepreneurs, if shareholders misuse corporate forms of limiting liability.
The Supreme Court broadly interpreted said clause, stating that personal liability could arise not only from the misuse of the corporate form, but also as a result of abusing limited liability. As the Supreme Court states, such abuse of corporate power occurs when a shareholder orchestrates activities aimed at tax evasion and the company is used by the shareholder as a tool for originating undeclared income. The burden of proof in such a case is on the plaintiff.
The Duty of Care
As for the personal liability of directors, the Supreme Court discussed the obligation of a director to manage his or her company in good faith and with due care, and in the best interests of the company. The Supreme Court explained that the minimization of tax liabilities and appropriate tax planning are part of exercising due care, since they aim to increase profit for investors. Nevertheless, they do not justify involvement in illegal schemes of tax evasion, due to the resulting criminal liability and the destructive effects they will have on a company in the long run.
Illegal tax evasion also deprives directors of the shield of the business judgment rule (i.e. the presumption that the decisions of the directors are informed, in good faith and in the company's best interests). All in all, company directors shall aim at increasing profit, but shall do so only by lawful means.
As a law firm, Mgaloblishvili Kipiani Dzidziguri (MKD) handles nearly all key aspects of Georgian law and advises on various investments in different sectors of the economy.
The firm benefits from a large team of expert lawyers and a well-established network of external professionals to provide its international and domestic clients with more specialization and focus. According to international legal directories, MKD's practice and lawyers have been consistently recognized as one of the leaders in Georgia.
The information provided in this article is general in nature and does not constitute legal advice. Please contact your legal advisor regarding your specific needs and situation.
Tamara has been a lawyer at MKD since 2005 with extensive experience in Corporate Law, Communications, Banking and Finance. She has advised local and international clients in a broad variety of high-profile cases and transactions relating to implementing various regional projects, structuring of transactions, acquisition of shares, regulatory matters and more.
Along with deep understanding and genuine affection for civil aviation, Mariam has a significant practice in Corporations and Banking and Finance under her belt, as well as expertise in Employment Law. What sets her apart is the international exposure, and in-house counsel prospective of how corporations operate, and how best to assist corporate clients.
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