Owners hide their responsibility behind a limited liability company (LLC)

The golden rule and one of the fundamental principles of business corporations is that members or founders of a business entity are not personally liable for the debts of that entity, up to the amount of the contributed founding capital. While in certain parts of Bosnia and Herzegovina, a company can be established with as little as 1 KM, a clear conclusion arises regarding the very simple possibility of founding a company, alongside the potential for avoiding the fulfillment of assumed obligations. The client has a valid legal basis for the collection of receivables, timely and fully provided the service. However, company XY, which is obligated to pay, is blocked, has no assets (or all assets are pledged), and has redirected its business to company XY1, which performs an identical activity. The founder of company XY1, whether a spouse, relative, or friend of the founder of company XY, is financially sound and has sufficient means to pay the debt but, of course, refuses to assume the debt or fulfill the obligation. The described situation is one that every lawyer in Bosnia and Herzegovina has likely encountered. Although theoretically, there is a possibility of proving the piercing of the corporate veil – an institute that allows holding the owners of the company responsible for the company’s obligations under precisely defined conditions, in the judicial practice of the former Yugoslavia, there are only a few judgments where the court practically acknowledged the existence of such abuse.

Although this issue is more elaborated in Western countries (lifting the veil – piercing the corporate veil), especially in the United States, the United Kingdom, and Germany, where there are rulings in such cases where the court has ruled in favor of the parties damaged in this way, in our regions, it is still considered an almost impossible legal procedure. Namely, the theory and applicable laws in Bosnia and Herzegovina stipulate that if the assets of a company are used for personal purposes and personal benefit, all accompanied by false representations of the state of affairs regarding the assets in business books and records, it leads to the piercing of the corporate veil. The application of the piercing of the corporate veil institute would enable, as a result of such actions that harm creditors and abuse the business entity, the unlimited liability of the capital owners.

The reasons for the inconsistency between theory and the practical approach of the courts are numerous: poorly and incompletely regulated legal provisions (which provide only a theoretical framework for the courts), a collision of legal norms in which one norm defines that founders are liable only up to the amount of the contributed capital, while another norm that should represent an exception does not provide clear and precise answers regarding what the exception entails. There is also a lack of adequate practice or a consistent stance of the courts or the High Judicial and Prosecutorial Council that would fill the legal gaps. In neighboring Serbia and Croatia, this issue is also gaining more attention, a consequence of recent years, business practices, and the opportunities that have opened up with the increasing involvement of private capital. This has led to legislative changes that will facilitate the application of the institute, and an increase in the number of judgments in favor of damaged creditors is expected. If we were to follow the example of the Law on Business Organizations of Serbia and the way this institute is regulated, then the law should prescribe who the responsible individuals are, or who can act contrary to imperative legal provisions and bear the consequences of entering the field of personal liability. It should also define the cases when the abuse of a business entity is considered, as well as the mechanisms of protection. Furthermore, the issue of piercing the corporate veil falls within the domain of both criminal law and fraud in business transactions. However, all investigations for these cases have been suspended because prosecutors believe that civil proceedings should be conducted to prove the piercing of the corporate veil, which, as previously explained, is almost impossible to prove.

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