Piercing the Corporate Veil: Application Challenges and Creditor Protection

The doctrine of piercing the corporate veil represents a set of rules under which shareholders of a limited liability company, stakeholders, and limited partners become personally liable with their entire personal assets for the company’s obligations, in cases where the rules of limited liability, meaning liability limited only to the value of the company’s assets, are abused.

Legal Framework in the Republic of Serbia:

In the Republic of Serbia, piercing the corporate veil is regulated by the Companies Law.

A shareholder of a limited liability company, a limited partner, and a stakeholder shall be personally liable with all their assets, or it shall be considered that there is an abuse of the limited liability rule for the company’s obligations when:

1. Use the company to achieve an objective otherwise prohibited to them;
2. Use or manage the company’s assets as if they were their own personal property;
3. Use the company or its property with the intent to harm the company’s creditors;
4. Reduce the company's assets to obtain benefit for themselves or third parties, while knowing or having to know that the company would be unable to fulfill its obligations.

Persons entitled to initiate a lawsuit establishing the piercing of the corporate veil are the company’s creditors, who must file within a subjective period of six months from the day they become aware of the abuse, or within an objective period of five years from the day the abuse occurred. If the creditor’s claim was not due at the time of awareness, the six-month period commences from the claim’s maturity date.

The second situation of statutory joint and several liability is regulated in connection with compulsory liquidation, when the controlling shareholder of a limited liability company and the controlling stakeholder of a joint-stock company are held jointly and severally liable without limitation for the company’s obligations even after the company has been removed from the register.

Judicial Practice in Serbia Regarding Piercing the Corporate Veil

Judicial practice in Serbia remains restrictive regarding the piercing of the corporate veil due to difficulties in proving abuse and the causal nexus between the specific abuse by a company shareholder and the damage sustained by the creditor filing the claim. Such an approach is understandable given that it is an exception to the general rule, but under no circumstances should it lead to the practical negation of the very institution itself.

The Supreme Court of the Republic of Serbia, in one decision, established that piercing the corporate veil requires the cumulative fulfillment of three conditions:

1. Existence of abuse of legal personality (for example, using the company to evade legal obligations or gain benefit to the detriment of third parties);
2. Acquisition of material benefit by the company shareholder or infliction of harm to creditors’ property;
3. Existence of a causal link between the abuse and the damage incurred.

Furthermore, the Commercial Appellate Court’s decision confirmed that founders’ liability for the company’s obligations may only exist if it is proven that the founder’s actions or commingling of their own assets with the company’s assets created an appearance of identity with the company for the purpose of achieving a prohibited goal, using the company’s assets as personal property.

The Court found that the claimant failed to prove that the founder contributed money as a loan to the company and used it as personal property, noting that the burden of proof lies with the claimant, and thereby concluded that the doctrine of piercing the corporate veil was not applicable in that case.

Comparative Overview of Piercing the Corporate Veil in European Legal Systems

The doctrine of piercing the corporate veil exists throughout Europe, but there are significant differences in the restrictiveness and scope of its application.

• In Germany, the doctrine is very restrictive and primarily regulated through legal norms concerning group company liability and abuse of legal entities, where piercing is possible in cases of damage to creditors or minority shareholders.
• In France, courts may extend insolvency proceedings to shareholders or parent companies that have de facto controlled and abused the assets of subsidiaries. Such abuses are addressed very strictly through a specialized insolvency procedure (“extension de procédure collective”).
• In the United Kingdom, the Supreme Court’s narrowed the use of the doctrine to situations involving abuse of legal personality with the aim of avoiding legal obligations (the so-called “evasion principle”), significantly restricting the previously broader “fraud exception,” which permitted veil piercing in cases of fraud or manifest abuse of corporate separateness.

Conclusion

 The doctrine of piercing the corporate veil in Serbian law still lacks sufficient significance as a tool for protecting creditors against abuses of corporate personality by business entities. Although the Companies Law provides a clear framework and applies European standards, judicial practice still requires further development to ensure full legal certainty and creditor protection. A comparative analysis of European systems confirms that this doctrine is fundamentally applied restrictively, with the aim of balancing economic freedoms and protecting third parties.

 Author:

Tara Govedarović, Junior Associate
Email(s): tara.govedarovic@prlegal.rs; legal@prlegal.rs