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New trends in piercing the corporate veil : The french approcah

New trends in piercing the corporate veil : The french approcah. LSCL 3 DECEMBER 2013. Stephanie Schweitzer. T: +33(0)1 44 94 40 50 . Stephanie.schweitzer@hfw.com. Underlying principle : " personnalité morale " .

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New trends in piercing the corporate veil : The french approcah

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  1. New trends in piercing the corporate veil : The frenchapprocah LSCL 3 DECEMBER 2013 • Stephanie Schweitzer • T: +33(0)1 44 94 40 50 • Stephanie.schweitzer@hfw.com

  2. Underlyingprinciple : "personnalité morale" • "the autonomy of moral and legal personality'"("autonomie de la personnalité morale") • "assets autonomy" ("autonomie du patrimoine") • creditors can not recover their debts on a good which does not belong to their debtors.

  3. The liberal 'common beneficial ownership' theory • The 70's trend: • French Courts relied upon the 1952 Convention which provides that "ships shall be deemed to be in the same ownership when all the shares therein are owned by the same person or persons". • Reaction to the development of single ship companies ? X Z A B

  4. The liberal 'common beneficial ownership' theory • French Courts only required that there be evidence of common beneficial ownership to authorise arrest of associated vessels. • This evidence was easily admitted by the Courts • This was in contradiction with article 1832 of the Civil code on the autonomy of legal personality • Consequences of this theory: • Exponentialincrease of litigationbefore the French Courts • Congestion of the French Courts • Execution of the LOU/ applicable law to the fictitiousness

  5. The end of the liberaltheory in shipping: tightercriteria • The Cour de Cassation put an end to this trend : • 1994, 'Osiris I' Case • 1996, 'Alexandre III' Case • Restatement of the "assets autonomy" principle  Necessity to demonstrate the fictitious or the fraudulent nature of the operating company

  6. The end of the liberaltheory in shipping: tightercriteria of companylaw • The claimant must prove the abuse of rights: • One or other of the owner and debtor companies is, in reality fictitious: absence of affectiosocietatis (i.e. intention to be involved in a partnership, in view of obtaining earning, but with the risk of contributing to losses - Cass. 3 June 1986) Or • One or other of the owner and debtor companies is fraudulent: it has been deliberately created to avoid liability

  7. Examples of fictitiouness Fictitiousness / sham • "Prête-noms" (front names) • Façadeconcealing the truefacts • "Confusion du patrimoine" : confusion of assets • Fictitious subsidiary : single ship companies Fraud • Creating a company for a deliberatelydishonestpurpose • The fraud / impropriety as evidence of the fictitiousness of the company

  8. The relevant criteria for piercing the corporate veil • Evidence of substantial transfer of funds by the company to a shareholder, without consideration/compensation; • Evidence that a ship owned by one company is mortgaged as security to finance other ships in the same fleet; • The absence of general meetings, or other signs of any independent corporate existence; • One shareholder having a large majority, the others being mere nominees; • The minority of shareholders being employees of the group;

  9. The relevant criteria for piercing the corporate veil • The creation of a "new" company (after problems have arisen) to conduct exactly the same business as the "old" company; • Same directors, same addresses, same telephone, fax and telex numbers; • The companies are registered in places where single ships companies are often established and where corporate documents are not published;

  10. Case Law : Examples Cour de Cassation- 15th October 2002, Latvian Shipping v/ StoczniaGdanska "Tarangona" and "Razna" LATVIAN SINGLE SHIP COMPANY LATREEFERS ORDERED 6 VESSELS TARANGONA SINGLE SHIP COMPANY SHIPYARD arrest RAZNA

  11. Case Law : Examples Court of Appeal of Rennes, 23rd May 2001, Maria Maria • The 3 companieswere part of the same group • All 3 wereLiberiancompanieswith the sameregisteredaddress • None of the companieshad the obligation to file annualtaxreturns or disclose the names of theirdirectors/shareholders. • All 3 had the samedirectors • The issuedshare capital wasdividedintobearershareswhichwereheld by one physicalpersonwhowasknown to be an intermediary (hewas an employee of the International Trust Code of Liberia) • The accountsdisclosed by the shipowningcompanieswere not certified. • the mortgages on each of the 2 vesselswere in favour of the samebank and eachanswered for the debts of the other to the samebank.

  12. Remedies • Nullity of the company ("action en nullité") / ("action en simulation") • Possibility to attach the assets of the controllers/beneficial owners • Extension of bankrupcyproceedings • Furtherremedies in case of fraud : • Criminaloffence : swindle … • "Action paulienne"

  13. Conclusion • The French principle of "assets' autonomy" is strongly reaffirmed by the French Courts. • Current reluctance to admit the fictitious or the fraudulent nature of a company • However, piercing the corporate veil is still possible on certain conditions.

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