End of corporate veil for British limited companies with principal place of management in Austria

Overview

In a recent decision, the Austrian Supreme Court stated that as a legal consequence of BREXIT "Austrian Ltds" will no longer be recognized as separate corporate entities. Thus, the previously existing corporate veil no longer applies and shareholders are now personally liable without limitation for the obligations of the former "Austrian Ltd".

The personal statute of a legal entity is governed by the law of the state in which the respective entity has its place of effective management (seat theory, "Sitztheorie"). In Austria, this rule may be superseded in cases regarding cross-border matters within the EU due to the priority of EU law. The freedom of establishment under EU law guarantees that a company validly incorporated in a member state - irrespective of the place of its effective management - is to be recognized in the legal form in which it was incorporated. As a result of this rule, it previously became popular practice to incorporate limited liability companies in the UK, while having the company's place of effective management in Austria ("Austrian Ltd"). However, as a legal consequence of BREXIT, such Austrian Ltds are no longer covered by the scope of application of the freedom of establishment under EU law. Consequently, there is no longer any legal basis for recognizing the legal capacity of an Austrian Ltd as such.

The Supreme Court therefore confirms the concerns, wherein the potential legal implications of BREXIT for Austrian Ltds and outlined possible measures to avert imminent adverse consequences. For those shareholders that did not adapt the Austrian Ltd to a respective Austrian corporate entity, the recent decision of the Austrian Supreme Court dated 27 January .2022, 9 Ob 74/21d, has brought shattering clarity about the legal fate of still "existing" Austrian Ltds.

Facts of the case

This case dealt with a legal dispute between a company established as an Austrian Ltd as the plaintiff and an Austrian entrepreneur as the defendant. In 2016 the Austrian Ltd brought the action, which was dismissed by the court of first instance in April 2021. According to the legal opinion of the court of first instance, the Austrian Ltd was no longer a legal entity as a consequence of BREXIT and had therefore lost its legal capacity to sue and be sued.

Decision of the Supreme Court

In its decision the Supreme Court concluded that the British limited company, which has its place of effective management in Austria, should have adjusted its corporate form in light of the consequences of BREXIT during the transitional period. Since the plaintiff failed to make such adjustments, the British Ltd as a "corporate entity" must now be assessed from the perspective of substantive Austrian corporate law.

Contrary to the opinion of the court of first instance, according to the opinion of the Supreme Court, the legal consequences of BREXIT did not cause "legal nullity" of Austrian Ltds. Instead, these entities are to be assessed as a partnership under civil law (“Gesellschaft bürgerlichen Rechts”). In the case of a one-person company, as it was in the present case, it is now to be assessed as a sole proprietor (instead of a partnership under civil law). As a result of this assessment, all assets and liabilities of the former Austrian Ltd are transferred to the shareholders by way of universal succession, who are therefore liable without limitation for all liabilities of the former Austrian Ltd.

Conclusion

The decision of the Supreme Court has drastic consequences for all shareholders who have failed to adapt the legal form of their company to Austrian corporate law during the transitional period. With the consequential dissolution of the corporation, the protective corporate veil no longer applies. Instead, the shareholders are now personally liable for the obligations of the former Austrian Ltd without limitation and with their private assets. If the shareholders are no longer able to service the debts that have been transferred to them, there is a threat of execution against their private assets. Another consequence of this decision is that any outstanding claims of the former Austrian Ltd. are to be claimed by the shareholders themselves, in their own name. Current lawsuits of the Ltd are now to be continued by the shareholders as a party.