By Rafael Sánchez, Bernardo Sada and Diego Medrano; Cuesta Campos y Asociados
This article presents scenarios found in Mexican legislation, showing a clear tendency to hold individuals, either legal representatives, agents, partners, or shareholders, liable for the unlawful acts carried out by the entities that they own and/or represent. The article provides practical tips as to how to navigate these issues.
Since the creation of commercial entities as legal figures with their own legal capacity, the need to implement a mechanism to protect personal liability for the individuals and their assets was identified. This is how the term "corporate veil" came into place, determining that, an individual would only be responsible to contribute with economic means to the business, and the individual's liability would be limited to such contribution. However, the use of this tool was distorted as people abused the protection granted. As a result, new tools to sanction these behaviors and make individuals liable for such acts were devised, giving birth to the idea of "lifting the corporate veil".
The term was coined by Maurice Wormser, in an article for the Columbia Law Review called "Piercing the veil of the corporate entity", in which this figure is analyzed. He explains that in some cases, there is a need to remove all protection, i.e. when the entity has been used to defraud, breach obligations, and generally, to engage in illicit behavior. The term "veil of the corporate entity" refers precisely to the idea of "lifting the veil", which literally means removing something that is covered to see, or have access to, what is behind.
These ideas have not had a systematic development within the Mexican legislation. However, we can find them immersed in different laws; for cases in which, as a result of the commission of unlawful acts or bad practices, penalties, fees, sanctions, and even custodial penalties might be established not only against the entity, but also against the individuals who own, compose, manage, and monitor the entity. Based on these sanctions, it must be noted that there is a clear tendency towards personal liability arising from the activity of entities, which is something crucial and that all the entities that intend to carry out activities in Mexico should be aware, even at a basic level.
Several examples of the aforementioned scenarios can be found in the General Act of Commercial Entities ("LGSM", for its Spanish acronym), which shows that the protection granted to the partners of an entity by law, might disappear.
Article 24 of the LGSM establishes that, in the event that a court resolution determines the fulfillment of an obligation to a third party, in which an entity was sued along its partners, and the assets of such entity are not sufficient to fulfill the obligation, the third party may request to be paid with the assets of the entity's partners. This is very important as in certain cases, the responsibility goes beyond the legal protection and reaches the assets of the partners or shareholders.
Likewise, the omission of information or lack of truth conducted by managers, legal representatives, or partners of an entity can generate liability that will have direct implications in their personal assets. For example, in the event that an entity is not duly registered before the Public Registry of Commerce, which is one of the main legal requirements to incorporate an entity in Mexico, and still decides to execute agreements, create obligations, and overall act before third parties, and said third parties are harmed; the partners of such irregular entity will assume the obligations with their assets in an unlimited, joint, and subsidiary manner. This, without mentioning any possible criminal activities in which they may engage due to irregular activity.
Additionally, a recent amendment to the LGSM, which established a new expedited procedure to dissolve and liquidate entities, foresees personal consequences in case that any of the scenarios required to qualify for such expedited procedure is not met (Article 241 Bis 1 of LGSM). In those cases, the law determines that the partners or shareholders, who engage in the aforementioned behaviors, must respond with their personal assets for any obligation or liability of the entity, in an unlimited, joint, and subsidiary manner.
One of the aspects where an entity should be more careful throughout the development of the business activity is in tax matters. Different scenarios demonstrate that the lack of compliance with the tax laws will result in personal liability for the individuals who compose it (partners or shareholders) or who participate in their daily activity (officers, agents, and/or legal representatives).
Several examples of the aforementioned can be found in Article 26 of the Federal Fiscal Code ("CFF", for its Spanish acronym), which establishes that the partners or shareholders of an entity can be jointly responsible for the payment of its contributions, in case it fails to meet certain obligations, such as not adequately maintaining the entity's accounts, or the lack of registration before the federal taxpayer registry, among others.
In the same way, managers or directors of the entity, and the persons whose role is the direction of the business activity, can become jointly responsible when the company fails to comply with tax obligations as a result of their decisions or omissions.
Likewise, when an entity is liquidated, the persons in charge of said liquidation (the liquidators) are jointly responsible for the payment of taxes and contributions, and in case that the requirements established by the tax laws are not duly fulfilled.
Beyond the above-mentioned consequences, which are mostly economic, there might be cases where liability goes beyond economic sanctions and reaches the criminal law sphere, which may result in imprisonment. An example of such criminal conduct can be found in Article 108 of the CFF, which establishes that if a person receives a wrongful benefit from the Mexican tax authorities through errors or deceptions, they may be sentenced for having committed tax fraud.
Diverse obligations that are imposed to both individuals and entities, can be found in laws such as the Federal Act of Environmental Responsibility ("LFRA", for its Spanish acronym) and the General Act of Ecological Balance and Environmental Protection ("LGEEPA", for its Spanish acronym). In the event of non-compliance with such obligations, different sanctions could arise, ranging from compensation for the damage inflicted and payment of fines, to prison sentences.
It is a matter of great relevance because, although sanctions can be imposed directly to the entities in the case of environmental damage, these same effects can also affect personally those who caused them. Articles 24 and 25 of the LFRA establish that any entity that damages the environment through its operations, will be responsible for the damage repair; and that any person with the obligation to oversee the activity of the entity regarding environmental matters will also be liable for the damages caused by the company.
This aspect has taken an extraordinary relevance in recent times as environmental awareness has increased. The foregoing can be reflected in the criteria issued by the Mexican courts, as observed in a case of pollution by a Mexican company that was involved in the disposal of chemical agents into a river in Northern Mexico, resulting in penalties of $23 million pesos (around 1.3 million USD), and which also condemned several directors of the same company.
There are many other cases, in addition to the ones mentioned above, as a result of several laws that could be applicable to the liability of individuals for the actions of the entities, such as labor laws and administrative laws; and in many cases, the economic consequences that may be generated, will be accompanied with criminal liability.
If an entity is operating or considering doing business in the Mexican market, it is advisable to have full knowledge of the Mexican legal system in order to avoid carrying out actions and behaviors that could affect the assets, rights, or even the freedom, of the partners, shareholders or representatives of such entity.
In order to protect the individual rights of the partners, entities doing business in Mexico should consider, without limitation, the following practical steps:
- Regularly update the corporate and financial books of the Company;
- Create and follow compliance practices, including a compliance manual and policies;
- Seek legal advice and financial consulting;
- Request that your legal and financial teams work closely to mitigate liability risks;
- Make sure your staff participates in trainings and workshops regarding corporate governance.
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Acedo, Octavio (2013) Desestimación de la personalidad jurídica de la sociedad anónima. Universidad Nacional Autónoma de México, Instituto de Investigaciones Jurídicas. México.
González-Meza,Gerardo (2016) El levantamiento del velo corporativo. Revista Mexicana de Derecho del Colegio de Notarios del Distrito Federal.