“Unlimited” liability of the Limited Liability Company members

Limited liability company (LLC) and joint stock company (JSC) as the most common forms of companies in Serbian legal system, are both created by the decision of their founding-members, who are also due to provide the company with its initial capital in monetary or non-monetary form.

From the moment of company’s registration before the Business register Agency, that initial capital shall formally become the basic capital of the company. The founders, who by the virtue of founding act (or in another way), undertook the obligation to pay or make a certain contribution to the company, are responsible to the company for the competition of that obligation.

The legislative intention is unambiguous – a company should be independent of its founders, having its own capital, property and its own legal identity.

The companies in Serbia are mostly established  in those two legal forms – a limited liability company and/or a joint stock company as the so-called capital based companies, due to the fact that there is a privilege, among other things, of the limited liability of their founders for company’s obligations.

Members and shareholders are responsible for the company’s obligations up to the amount of their invested funds in the company.

Accordingly, when the company does not have sufficient funds to settle its obligations, its legal existence shall be terminated through the bankruptcy procedure, and the personal capital of the members of the company (LTD) is, in principle, at a safe distance in this procedure.

Application of those legal rules, though, often may lead to denial of company creditors’ legal claims .

Thus, the principle of limited liability of members / shareholders for the company obligations will apply only under the condition that they did not misuse the company in order to achieve illegal or fraudulent goals.

Therefore, according to the provision of Article 18, paragraph 2 of the Companies Act, it is  stipulated that the typical means of abuse of company exist if a member of a limited liability company / shareholder (or legal representative of these individuals if they are legally incapable):

1. Uses the company to achieve a goal otherwise forbidden to him
2. Uses the company’s assets or uses them as if they were his own
3. Uses the company or its assets with the purpose of damaging the company’s creditors
4. In order to procure personal gain or gain for third-parties reduces the company’s assets, although the person was aware or had to be aware that the company would not be able to fulfill its obligations.

The listed means of abuse are given exempli causa, ergo the other forms of abuse may appear as the limited liability rule violation.

This legal institute is called Lifting the corporate veil, because the shareholder will not be able to hide „behind the company”  if his actions were unlawful and harmful to the company.

 The main goal of the Lifting the corporative vail Institute is to prevent the abuse of company to achieve illegal or fraudulent goals – illegal acquisition of personal property of shareholders or members through the company, but also the goal is to protect the legal rights of company creditors.

The realization of its legal effects shall be visible in a court proceeding.

Properly conducted, this proceeding will result in shareholders being condemned as jointly obliged to compensate creditor’s claims from their personal property.

Thus, the legal principle of limited liability of shareholders is guaranteed by law as long as shareholders do not abuse the individual legal subjectivity of the company for illegal or fraudulent purposes.

The legal deadline for filing a lawsuit is preclusive – six months from the day of plaintiff becoming aware of the abuse, and no later than five years from the day the abuse occurred.

Therefore, in all those situations where proper evidences exist proving a member or shareholder has abused the company for fraudulent purposes due to increase of personal property, invoking the institute of Lifting the corporate veil shall set a new limit of members liability – personal property of the founders, on the grounds that they acquired it through the abuse of company.