A slap on the wrist of judges: piercing the corporate veil from the perspective of the MP of Economic Freedom

Imagine arriving at the office after a fantastic weekend with the following surprise: all the assets of the company you work for have been blocked; or, worse, all your private assets have been made unavailable. What now? What do you do? Being petty on means and efforts to defend the company or even yourself is not an option in these situations. And patience to revert this situation is a must.
This situation is not rare in the Brazilian business environment, which is currently in constant instability and legal insecurity with the wrongful use of the so-called “piercing the corporate veil”, where partners, administrators or even third parties are involved in judicial discussions as liable for the legal entity with which they have had any – or even none – contractual relationship in the past.
The good news is that Provisional Measure No. 881, or as it has been affectionately called, the “MP of Economic Freedom”, published last month, made significant changes to the rule of piercing the corporate veil provided for in the Civil Code and established that the scope of third-party assets depends on the express demonstration and proof of the abuse of the personality of the legal entity, through misuse of purpose or property mismatch. The MP defined:i) misuse of purpose as the fraudulent use of the legal entity aiming to harm creditors or to commit illegal acts; andii) asset confusion as the absence of de facto separation of the assets of the legal entity and the third party. In addition, it expressly provided that the mere existence of an economic group without the presence of such requirements does not authorize the disregard of the piercing the corporate veil.
It was a slap on the wrist of judges!
Its worth remembering that the Civil Procedure Code had already been innovative in requiring the need to establish a prior procedural measure to identify the third party’s liability to pierce the corporate veil of a legal entity in order to reach such person for debts in a judicial collectionIDPJ). Such measure provides for the prior summons of the third party to acknowledge such facts and have the opportunity to provide a defense before his/her assets are blocked and made unavailable.
In tax matters, much has been discussed since then about the IDPJ requirement for cases of third party liability in tax enforcements.
The First Panel of the Superior Court of JusticeSTJ) upheld, at the beginning of this year, that the establishment of the IDPJ is necessary in cases of tax enforcement in the event of abuse of legal personality. However, as a good example of insecurity, the Second Panel of the STJ just decided this month the exact opposite: the IDPJ would be incompatible with the tax enforcement.
With the expectation that the MP of Economic Freedom will be approved by the National Congress and converted into law, we would like to alert you that even though we are breathing new airs of freedom in this fight against bureaucracy brought by the MP, which already produces immediate effects, it is early to say that such measure will have an immediate positive effect on court decisions. We hope so! However, our country coexists with the abuse of the institute of piercing the corporate veil for so many years and changing this can take time.
By Tatiana Del Giudice Cappa Chiaradia, attorney at Candido Martins Advogados

Embers – Sándor Márai

As Brasas is a stunning book dealing with a reunion of an old Hungarian general, Henrik, with an old friend, Konrad, in his castle in the Carpathian region. In this meeting, which occurs after forty years, we have the conversation of these two men oscillating between an idealized past and a decadent present. The conversations depict a distant time, traveling from childhood to adulthood of the two men, who lived the two great world wars. Even with the passing of time, a fact that occurred the last time they met still troubles the general, who is determined to discover the truth, which ends up serving to address other, broader issues.

The premature death of EIRELI

Provisional Measure No. 881, approved on April 30, 2019 and commonly known as “The MP of Economic Freedom”, has brought, among several innovations, the possibility of a limited liability company having only one partner thus making life very easy for most Brazilian entrepreneurs. However, faced with this possibility, many are wondering if this innovation will cause the early extinction of the “individual limited liability company” known as Eireli.
Eireli was created in 2011 with the objective of guaranteeing the limitation of liability of the individual entrepreneur, with the possibility of being incorporated by only one partner. This was to avoid the creation of limited liability companies in which one partner has 99% of the equity and another one as 1% to assure the plurality of quotaholders and also to formalize business activity.
Although it sounds interesting, Eireli has two relevant aspects, which, in practice, do little to prevent the informality of economic activity: the law requires an Eireli to have a share capital equal to or greater than 100 minimum wagesapproximately R$ 100,000.00) and determines that only an individual can be shareholder of an Eireli.
Faced with the possibility brought by the MP, with the incorporation of a limited liability company with a single shareholder without the need for minimum capital, the use of an Eireli no longer makes any sense, which in practice would result in the disuse of this type of company and, consequently, its extinction.
Although it produces immediate effects, the MP of the Economic Freedom depends on the approval of the National Congress for final transformation into law. In the event the MP becomes law, we believe that most entrepreneurs will have a preference for the limited liability company with one shareholder and, as a result, we will see Eireli’s early death in business practice.
By Karen Harumi Hamada, attorney at Candido Martins Advogados