In Brazil, the cornerstone of corporate law is separate legal personality (asset segregation), under which the obligations of a legal entity do not merge with the assets of shareholders and directors.
Accordingly, as a rule, personal liability is exceptional, as it depends on a legal basis and evidence of fault or intent, abuse, fraud, diversion of purpose, and commingling of assets in the management of the company.
In business practice, there are recurring gateways for personal attribution, chiefly through three legal mechanisms: (i) civil liability for one’s own acts, (ii) disregard of the legal entity (piercing the corporate veil), and (iii) tax and criminal liability in specific contexts.
Below, we identify those responsible for the company’s management and their exposure to civil and criminal liability.
Directors and officers
This category includes administrators appointed in the articles of association or by-laws, directors, members of boards, managers with management powers, and the so-called de facto administrator, i.e., the person who, in practice, exercises decision-making command regardless of being listed in the company’s constitutive acts.
Personal risk tends to increase where there are powers of representation, signature authority, command over sensitive areas of the business, such as the tax, financial and environmental areas, and direct participation in the decision-making process.
Shareholders
Under Brazilian law, in principle, shareholders are liable up to the limit of their quotas or shares and their obligation to pay in capital, and their personal liability typically depends on their own unlawful act, acting as a de facto manager, or exceptional statutory circumstances, for example, as a tax responsible party for certain tax collections.
Legal representatives, attorneys-in-fact and agents
These are individuals who represent the company before third parties and public authorities, by operation of law, corporate act or power of attorney.
The role of representative does not create automatic liability, but it increases exposure where there is excess of powers, execution of sensitive declarations or documents, as well as participation in unlawful acts.
Civil liability: when personal assets may be reached
Rule and exceptions (regular acts of management v. unlawful acts)
As a rule, the civil liability of directors is subjective; it requires proof of culpable or intentional conduct, damage, and a causal nexus.
In corporations (sociedades por ações, S/A), Law No. 6,404/1976 sets out fiduciary duties (diligence, loyalty and corporate interest) and, broadly speaking, excludes personal liability for corporate obligations undertaken in a regular act of management, while preserving liability for fault or intent, breach of law or by-laws, and conflicts of interest.
Typical grounds for civil attribution
- Breach of the duty of diligence (decisions taken without minimum information, without customary safeguards, without reasonable controls).
- Breach of the duty of loyalty and conflicts of interest (benefiting oneself or a third party to the detriment of the company).
- Ultra vires act / excess of powers or breach of statutory limitations known to the third party.
- Fraud, simulation, diversion of assets, accounting manipulation, deliberate concealment of relevant information.
- Material omissions, such as failing to implement minimum controls when the risk was foreseeable and avoidable.
Shareholders: general rule of non-liability and points of attention
A shareholder is ordinarily not a personal debtor of the company’s obligations. However, they may be held liable for their own unlawful act; for a blurring of their conduct with management (de facto manager); or for abuse in management that allows the disregard of the legal entity.
Disregard of the legal entity (IDPJ): the most common procedural route. Major theory (general rule) – Article 50 of the Civil Code
As a general rule, Brazilian law adopts the so-called major theory, under which disregard requires proof of abuse of the legal entity, characterized by diversion of purpose or commingling of assets. The measure is exceptional and depends on concrete evidence of the abuse and the causal link between the abusive conduct and the harm that one seeks to remedy.
Minor theory in Consumer Law
In consumer relations, there is a more expansive regime, as provided for in Article 28 of the Consumer Defense Code, which may facilitate the episodic lifting of asset segregation in the circumstances set out in that statute. Even in this environment, case law tends to require adequate reasoning, with due regard for the adversarial process.
Procedure – Incident for Disregard of the Legal Entity
The Code of Civil Procedure, in Articles 133 et seq., provides for the Incident for Disregard of the Legal Entity (IDPJ), with adversarial proceedings and the right to produce evidence.
In the context of tax foreclosure (execução fiscal), the compatibility and necessity of the incident under the specific procedure of Law 6,830/1980 is debated.
Tax liability (tax foreclosure): practical focus of patrimonial risk
The National Tax Code establishes the personal liability of directors, managers or representatives for tax obligations arising from acts performed with excess of powers or in breach of law, the articles of association, or by-laws.
The case law of the Superior Court of Justice has consolidated important limits to avoid automatic liability of managers, through decisions that became predominant, establishing that the company’s mere non-payment of a tax does not, by itself, generate joint and several liability of the managing shareholder.
However, when the company is irregularly dissolved (a company that ceases to operate at its tax domicile without notifying the competent authorities), it triggers liability of shareholders and directors, who may face redirection of the tax enforcement proceeding, with risks to their entire assets, to the detriment of the company’s assets.
In sum, the repetitive case law of the Higher Courts refined the criteria for attributing liability to the manager, distinguishing the position of those who withdrew regularly before the irregular dissolution and the liability of those who held management at the time of the irregular winding-up.
In sum, redirection based on irregular dissolution is not permitted against a shareholder/third party who, although managing the legal entity at the time of the taxable event, withdrew regularly and did not cause its subsequent irregular dissolution. Conversely, redirection may reach those who had management powers on the date of the irregular dissolution, even if they were not the manager on the date of the taxable event of the unpaid tax.
Criminal liability: personal nature, fault or intent, and limits of attribution
Under Brazilian Criminal Law, a link is required between the natural person charged and the typical fact; that is, the manager must have contributed to the crime committed by the legal entity. The status of shareholder or legal representative, standing alone, is insufficient to support an indictment.
In crimes of collective authorship, it is admitted, in certain circumstances, that the conduct of each agent be described less minutely, provided that the criminal complaint filed with the court correlates, at least minimally, the facts to the activity of the accused, always ensuring full defense. This is because the complaint cannot be so generic as to impute the crime merely by virtue of the position held, whether shareholder, director or attorney-in-fact. Although, in collective offenses, a more general description of conduct may be allowed, a minimum correlation between facts and the accused’s conduct remains indispensable.
- Therefore, to avoid such liability, a genuine segregation of assets is required between the company’s accounts and those of shareholders and directors, with consistent contracts and transactions, so as to avoid commingling of assets.
- If the business is closed, it must be done in a regular manner, with notice to the competent authorities and preservation of records.
Accordingly, in Brazil, directors and officers incur civil and criminal liability when (i) they breach duties of diligence/loyalty and cause damage (subjective liability), (ii) they engage in acts involving abuse/fraud that justify disregard of the legal entity and/or redirection to the individual, or (iii) they fall within specific statutory hypotheses (with particular emphasis on tax matters, in which irregular dissolution and management powers are determinative).
Author: Willian Fiore Brandão
Fiore Brandão Advogados
Av. Industrial, 780 cj. 1112/1113
BR-09080-500 Santo André – SP
Tel (11) 4437 2074