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CORPORATE LAW: The Rome Court rules unlimited liability of a sole owner of a limited liability corporation for failure to properly disclose of changes in ownership structure

Author: Michael Louis Stiefel
Date: April 21st 2013
Practice area: Corporate Law

The Rome Court rules unlimited liability of a sole owner of a limited liability corporation for failure to properly disclose of changes in ownership structure.

The Rome Court has recently come down clearly in favour of the strict enforcement of legislation requiring full pubic disclosure of any transactions affecting the ownership structure of limited liability companies with a sole owner.

The decision is noteworthy as it is one of few to address  the scope sect. 2462 of the Italian Civil Code which stipulates that  “In the limited liability company, only the company is liable for the fulfilment of corporate duties. In the event of insolvency of the company, with reference to corporate debts that arose when the corporate shares  belonged to a sole party, the sole party is unlimitedly liable when conferments have not been carried out in accordance with sect. 2464 civil code or so long as public disclosure foreseen by sect. 2470 civil code has not been implemented”.

The case involved an Italian limited liability company with a sole owner (“Company A”) that had ostensibly transferred its registered offices from Italy to Romania without going through any prior liquidation proceedings, thereby frustrating the rights of its creditors.

Company B, an Italian subsidiary of a multinational corporation, had successfully sued Company A for the payment of outstanding sums, only to learn, upon seeking to enforce the Court decision, that Company A, in the course of the proceedings had reportedly transferred its offices and business to Romania. However, upon consultation of the Romanian business registry, Company B’s counsel discovered that Company A had indeed never been transferred to Romania and that, under Romania law, it was not legally possible to transfer a Company to Romania from a foreign jurisdiction.

Thus, it became evident that Company A had in reality been dissolved without carrying out compulsory liquidation procedures, thereby prejudicing the rights of Company B and of other creditors.

Company B, therefore, filed suit against the sole owner and the Director of Company A, who had respectively resolved and implemented the company’s “transfer” to Romania, seeking compensation of damages from both parties on the grounds of liability.

In the ensuing proceedings, the Director of Company A failed to appear, whereas the sole owner entered a defence stating that he indeed had not been sole owner of Company A when the resolution to transfer it to Romania was adopted, as he had previously sold 80 % of his holding in Company A to its Director. The “sole owner” thus claimed that he had played a role neither in the adoption nor in the implementation of the transfer resolution and that, therefore, he could not be held liable for the resolution itself and/or for its consequences.

The Plaintiff,  following this defence and on the basis of the disclosure of a different ownership structure than the one that was visible through consultation of public records, advanced an additional claim of unlimited liability of the former sole owner of Company A for all the corporate debts that arose when he had been effectively sole owner, on the grounds that he had failed to give proper disclosure, pursuant to sect. 2470 civil code, of the change of Company A from a sole ownership to a dual ownership structure.

The Defendant countered, arguing that: a) The additional claim filed by the Plaintiff was not admissible as it constituted a new claim that could and should have been filed in the initial writ of summons; b) the provision establishing unlimited liability of the sole owner for failure to give proper disclosure of sole ownership status, only concerned the disclosure of the establishment of sole ownership and not, on the contrary, the cessation of sole ownership; c) Company B could not claim unlimited liability of the sole owner for corporate debts, as it had not sought to obtain the payment of the outstanding debit from Company A through the filing of insolvency proceedings against the Company itself.

The Rome Court ruled in favor of the Plaintiff, holding that:
1. The additional claim filed by the Plaintiff was admissible, as it was based on facts that became known only as a consequence of the Defendant’s defence and that were not otherwise of public domain.
2. For the purposes of establishing the unlimited liability of the sole shareholder for the debts of the Company that arose during sole ownership, limited liability of the sole owner is lost whenever the sole owner fails to carry out proper public disclosure regarding every single step regarding the transfer of ownership. In so doing, the Court underlined that the rationale of the underlying legislation (sections 2464 and 2470 civil code) is to ensure that public disclosure is given to any means by which the sole ownership structure ceases and, therefore, in any event that the relative disclosure fulfilments are not properly carried out, then unlimited liability applies.
3. Although the Plaintiff had not filed bankruptcy proceedings against Company A prior to suing the Defendant,  sufficient evidence of Company A’s state of insolvency had been provided in light of:
a. the previous Court ruling ordering Company A to pay sums to the Plaintiff;
b. the unsuccessful attempt at enforcement of the Court ruling against Company A through the service of a payment demand upon Company A’s Director;
c. the putative transfer of Company A to Romania without the prior liquidation of  its outstanding debts;
d. the dispersion of Company A’s  assets as a consequence of the resolution to transfer the Company to Romania which was not effectively implemented.

The Rome Court thus ordered the Defendant to pay Company A’s debt to Company B, plus accrued interest and attorneys’ fees.

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