The main advantage of a limited liability company is that its partners are not liable for the company’s debts with their personal assets. The company is an independent legal entity with its own property and obligations, and a partner’s risk is, as a rule, limited to the contribution they have made.
However, this protection is not absolute. When a partner uses the company’s legal form to the detriment of creditors, a court may pierce the corporate veil and order the partner personally to pay the company’s debt. The purpose of this doctrine is not to abolish limited liability, but to prevent its abuse.
The Legal Rule: When Does a Partner Face Personal Liability? (Article 26)
Article 26.1 of the Law of Georgia on Entrepreneurs sets out the general rule: a partner of a limited liability company is not liable to creditors for the company’s obligations. Article 26.2, however, provides for an exception. A partner is personally liable to a creditor if two conditions are met at the same time:
- the partner abuses the legal form of limited liability; and
- the company is unable to satisfy the creditor’s claim.
Both conditions must be present. If the company has sufficient assets, the creditor must first look to the company, and the partner’s liability is only secondary, or subsidiary. The law also states expressly that this applies in exceptional cases. The mere fact that a company has become insolvent, that the business has failed, or that the partner is its sole owner does not, in itself, amount to abuse.
Grounds for Piercing the Corporate Veil: Georgian Court Practice
The law does not define what constitutes abuse. The answer has been shaped by court practice. In its decisions of 6 May 2015, the Supreme Court of Georgia, applying an equivalent provision of the previous law, held that abuse must be interpreted broadly and identified several typical situations.
Commingling of Personal and Company Assets (Alter Ego)
The first is commingling of assets. Where the property of the company and the partner is not kept separate, company funds are used for the partner’s personal needs and personal expenses are booked as company expenses, the company effectively becomes the partner’s alter ego.
Disregard of Corporate Formalities
The second is disregard of corporate formalities: partners’ meetings are not held, management and representation powers are not clearly separated, or proper accounting and financial reporting are not maintained.
Maintaining proper corporate formalities and documentation is essential to a company’s legal security. Contract drafting and legal review can help businesses ensure that their contractual relationships are properly documented.
Inadequate Capitalization
The third is inadequate capitalisation. Georgia has no minimum capital requirement, but according to the court, a problem arises where the company’s capital is clearly too small or unsuited to the nature of its business and the risks it creates. This is particularly relevant for creditors who did not choose to deal with the company, such as victims of harm or the state.
Using the Company as an Instrument for an Unlawful Purpose
The fourth is using the company as an instrument for an unlawful purpose. The court found abuse where a partner directly managed the company in order to evade taxes and the company had been turned into a source of undeclared income. In these cases, the partners were held personally liable for the company’s tax debt, including late payment interest.
The same decisions established several important rules. The burden of proving abuse lies with the claimant creditor. A criminal conviction of the partner does not automatically result in civil liability, and the court treats it only as one piece of evidence. The partners’ liability for the company’s debt is subsidiary, while among themselves they are jointly and severally liable.
Other Situations Where Partners Face Personal Debt Liability
Piercing the corporate veil is not the only way a partner may become personally liable because of a company’s debts.
Obligations Assumed Before Registration (Article 10)
The first is obligations assumed before registration. Under Article 10 of the Law, the founding partners and those who acted on the company’s behalf before its registration are jointly, severally and without limitation liable for obligations assumed in its name. They are released if the registered company approves these obligations and nothing else has been agreed with the creditor.
Dividends Received in Breach of the Law (Articles 32–33)
The second is dividends received in breach of the law. Article 33 prohibits the payment of dividends if this would cause the company’s insolvency, and Article 32 allows a paid dividend to be reclaimed if the partner knew or should have known that the law or the charter was breached when it was distributed.
Unpaid Capital Contributions (Article 27)
The third is an unpaid contribution. Article 27 prohibits releasing a partner from the obligation to make a contribution, so capital that was agreed but never paid in may become a real financial obligation for the partner when the company is in crisis.
Voluntarily Assumed Guarantees and Director Liability
The fourth is voluntarily assumed obligations. Banks and major counterparties often require a personal guarantee or surety from the partner. In that case, the partner is liable not because the veil is pierced, but on the basis of their own contract. Finally, if a partner also serves as the company’s director, they additionally bear the liability that applies to breaches of directors’ duties, including the duty to file for insolvency in time.
How to Protect Your Personal Assets and Maintain Limited Liability
Limited liability protects a partner most reliably when the company genuinely operates as an independent entity. In practice, a few rules make the difference:
- Keep personal and company finances separate and do not use company funds for personal expenses.
- Maintain proper accounting records and financial reporting.
- Make decisions in accordance with the procedure set by the law and the charter, and keep the minutes of the general meeting.
- Ensure the company has capital that matches the scale and risks of its business.
- Document transactions between the partner and the company in writing and on market terms. Where the company has a sole partner, the law requires written form for such contracts, except those concluded in the ordinary course of business (Article 20.2).
- Distribute dividends only when doing so does not threaten the company’s ability to pay its debts.
For companies seeking ongoing support in keeping their corporate documentation in order, legal outsourcing services help with properly documenting decisions, minutes and internal transactions.
Conclusion
Limited liability is a partner’s right, not unlimited immunity. Piercing the corporate veil is an exception that requires the partner to have abused the company’s legal form and the company to be unable to satisfy the creditor. Commingling of assets, disregard of formalities, clearly insufficient capital and the use of the company for unlawful purposes are the circumstances courts examine most closely. Respecting corporate order and seeking timely legal advice are the best ways for a partner to protect their personal assets.
Corporate and business law services help companies and partners structure their businesses, assess legal risks, and address matters relating to partner liability.
Legal Assistance and Corporate Structuring with Nomos Georgia
The law firm Nomos Georgia advises partners, companies and creditors on corporate structuring, partner liability and corporate disputes. If you want to assess how well your personal assets are protected, or you are a creditor planning to recover a debt directly from a partner, contact us and let us assess your situation.
