Corporate veil piercing in the context of asset attachments in Switzerland

Corporate veil piercing in the context of asset attachments in Switzerland

On 10 April 2019, the High Court of the Canton of Zurich (the Zurich High Court) uploaded an interesting new decision to its website, which contains noteworthy considerations in relation to asset attachments pursuant to Art. 271 et seq. of the Swiss Debt Enforcement and Bankruptcy Act (the DEBA).

The above-mentioned new decision has the case number PS180184-O/U and is dated 18 October 2018.

As far as a general overview of asset attachments under Swiss law is concerned, please refer to my article on this topic, published in October 2016 in Dispute Resolution International, the journal of the IBA’s Dispute Resolution Section (Vol 10 No 2, October 2016, at pages 133 et seq.).

Background to the Zurich High Court judgment PS180184-O/U

In a simplified form, the dispute that led to the above-mentioned new Zurich High Court decision derived from a sales and purchase contract related to emeralds. Under such contract, the claimant (i.e., the purchaser under the contract) had to make significant advance payments to the defendant (i.e., the seller under the contract), which were made to a BVI shell company (BVI CO), on the defendant’s directions. The purchase agreement was not executed as agreed, and the claimant filed a claim for reimbursement of the advance payments with an arbitral tribunal, which had been granted in its entirety. The claim was directed against the defendant, and it was the latter, not BVI CO, who was ordered in the arbitral award to reimburse the advance payments to the claimant. In an effort to collect his claim, confirmed in the arbitral award, the claimant tried to attach assets held by BVI CO with a Swiss bank.

The disputed legal issue and the Zurich High Court’s considerations

The usual requirements for an asset attachment pursuant to Art. 271 et seq. of the DEBA were met in the present matter. Nevertheless, the Zurich District Court as the first instance court refused to grant the requested attachment order, essentially on the basis of the following reasoning:

Pursuant to the Zurich District Court, the question whether, in the context of the attachment proceedings, the claimant could pierce the veil of BVI CO, in whose name the relevant banking relationship had been opened, had to be determined in light of the applicable foreign law and not of Swiss law. The claimant should have presented to the court the relevant foreign law. Since the claimant failed to present such law to the court, at least in an outline, the claimant’s request for an attachment order has to be denied.

The above was the Zurich District Court’s main argument. In the sense of a supporting argument, it held that when applying Swiss law to the mentioned issue, the veil of BVI CO could not be pierced, basically because the claimant had agreed to make the advance payments to another legal entity than the contracting party.

The Zurich High Court as the court of appeal disagreed with the first instance court.

As far as the proof or presentation of the applicable foreign law is concerned, the Zurich High Court held, in essence, that because of the time urgency of asset attachment proceedings, and because the issue of the piercing of a corporate veil is complicated, it is justified to dispense with the issue of the applicable foreign law and to directly apply Swiss law to the disputed question, i.e., whether or not the veil of BVI CO may be pierced in light of Swiss law under the given circumstances (decision PS180184-O/U, at consideration IV. 2.3, page 10).

Regarding the application of Swiss law to the above-mentioned issue, the Zurich High Court first discussed the criteria for piercing a corporate veil, as they have been determined by the Swiss Federal Tribunal. Such criteria are, essentially, that (i) there is, from an economic viewpoint, identity of two formally independent legal entities or that, at least, the legal entity that shall be disregarded is economically controlled by the other entity; and (ii) that invoking the formal independence of the two legal entities is to be considered abusive in light of all relevant circumstances (decision PS180184-O/U, at consideration IV. 2.4, pages 10-11).

Applying the aforementioned criteria to the matter at issue, the Zurich High Court included in its judgment certain quotes from the defendant’s witness statements filed with the arbitral tribunal. It also referred to the following statement contained in the arbitral award (decision PS180184-O/U, at consideration IV. 2.6, page 12):

Mr B._____’s (i.e., the defendant’s) reason for requiring US$ 50 million to be paid outside Zambia was that the practical reality of doing business in Zambia is that the payment of a large sum would have caused Mr B._____ significant problems. His bankers would have demanded explanations and would not have let him transfer the money; and the Government would have tried to take as much as possible by taxes.

Based on the above-mentioned sources of information, the Zurich High Court basically retained that the defendant would seem to have used BVI CO as a typical shell company, namely transferring assets to such company without legal basis, and that defendant’s invoking of the formal independence of BVI CO would likely amount to an abuse of rights. In the Zurich High Court’s words (decision PS180184-O/U, at consideration IV. 2.6, page 12):

Der Umstand, dass der Gesuchsgegner erklärte, die Gesellschaft zu benützen, um Zahlungen ausserhalb Sambias entgegenzunehmen, spricht dafür, dass er ohne Rechtsgrund Geld auf die Gesellschaft verschiebt und damit sein eigenes Haftungssubstrat vermindert. Eine Berufung der Gesellschaft bzw. des sie wirt- schaftlich beherrschenden Gesuchsgegners auf die Personendualität dürfte unter diesen Umständen gegen Treu und Glauben verstossen und rechtsmissbräuchlich sein. Dies selbst wenn der Gesuchsgegner schon bei Abschluss der Kaufverträge die Zahlung an seine ausländische Gesellschaft verlangt haben sollte und unabhängig davon, ob die Gesuchstellerin von der wirtschaftlichen Identität wusste.”

The fact that the defendant declared that he would use the company to receive payments outside Zambia suggests that he was shifting money to the company without any legal reason and thus reducing his own liability substrate. Under these circumstances, an invoking of the company or of its beneficial owner of the formal independence of the company is likely to be contrary to good faith and to constitute an abuse of rights. This is the case even if the defendant had already demanded payment to his foreign company when the purchase agreement was concluded and irrespective of whether the claimant knew of the economic identity.” (tentative English translation)

Pursuant to its reasoning summarized above, the Zurich High Court came to the conclusion that on the basis of a summary examination of the pertinent issue, which is sufficient in Swiss proceedings related to a request for an asset attachment (which are conducted in summary proceedings), it would appear to be likely that BVI CO’s veil is to be pierced for the purposes of the asset attachment at issue.

Conclusion

The new judgment discussed herein is interesting, namely because it is an example of a successful attachment of a shell company’s assets with a Swiss bank, with the goal to collect a claim that is directed not against the shell company, but against its beneficial owner.

Philipp H. Haberbeck, Zurich; first published on LinkedIn on 17 April 2019 (www.haberbeck.ch)

The information contained in this post is for general informational purposes only and is not intended to constitute legal advice. Readers of this post should not take any actions or decisions without seeking specific legal advice.

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