When the Real Owner Can Be Held Liable for a Company’s Debts

The general rule of corporate law remains unchanged: a legal entity is independently liable for its obligations, while its shareholders are not liable for the company’s debts merely because they hold corporate rights. However, judicial practice is gradually defining the limits beyond which a company’s separate legal personality can no longer be relied upon as a means of avoiding liability.

This concerns the so-called doctrine of “piercing the corporate veil”, which allows courts to assess not only the formal ownership structure of a business but also the actual conduct of the persons who controlled it. For creditors, this becomes particularly important where the company has already been liquidated and its assets are insufficient to satisfy outstanding claims, while the circumstances suggest that the insolvency may have resulted from the actions of the person who actually controlled the business.

Why Traditional Subsidiary Liability May Not Be Enough

The traditional mechanism for holding owners and managers liable remains subsidiary liability within bankruptcy proceedings, as provided for by Article 61 of the Code of Ukraine on Bankruptcy Procedures. Its application, however, is subject to significant procedural limitations. Claims against controlling persons are brought within bankruptcy proceedings, and the liquidator must establish a connection between their conduct and the legal entity’s insolvency.

Once the liquidation procedure has been completed, the possibilities offered by this mechanism become significantly narrower. This raises an important question: can a creditor protect its rights outside bankruptcy proceedings that have already been closed?

Judicial practice is developing an approach under which a corporate structure should not serve as an absolute shield for a person who effectively used a legal entity as an instrument for transferring assets or avoiding settlements with creditors. The legal basis for such protection may therefore lie not only in the special provisions of bankruptcy legislation but also in general civil law rules, including those governing damages, unjust enrichment, good faith and the prohibition of abuse of rights.

Beneficial Ownership Alone Is Not Enough

The expansion of creditors’ remedies does not mean that an owner automatically becomes liable for every debt of the company. The causal link is crucial. It is not enough to establish that a particular person was a shareholder, director or ultimate beneficial owner. It must also be demonstrated that this person’s decisions or conduct caused the loss of assets, deterioration of the company’s solvency or inability to settle its debts with creditors.

Case No. 904/7905/16 is illustrative in this respect. The liquidator argued, among other things, that the company’s bankruptcy resulted from the disposal of a claim worth UAH 27.8 million. However, the court established that the relevant receivable was effectively uncollectible and, therefore, its disposal could not have caused the company’s insolvency. This approach is fundamental: an unprofitable or unsuccessful business transaction does not in itself prove that the company was deliberately driven into bankruptcy.

Business activity inherently involves risk. The creditor’s task is to demonstrate where ordinary commercial risk ends and bad-faith conduct by the controlling person begins.

What a Creditor Actually Needs to Prove

The standard of proof established by Article 79 of the Commercial Procedural Code of Ukraine — the balance of probabilities — plays an important role. A creditor is not expected to produce a written instruction from the beneficial owner explicitly ordering the transfer of assets while leaving debts behind in the troubled company. In corporate disputes, such evidence will usually not exist. What matters is the totality of circumstances.

Relevant evidence may include the movement of funds between related entities, common directors and addresses, concentration of business transactions within one corporate group, transfers of assets to companies controlled by the same beneficial owner, the absence of genuine business activity by the debtor, and the simultaneous preservation of profitable operations in other legal entities within the group. Taken together, these facts must make the creditor’s version of actual control and bad-faith use of the corporate structure more convincing than the defendant’s explanation based on ordinary business considerations.

At the same time, liability must be individualised.

For example, in Case No. 28/29-б-43/212-2012 concerning Tridenta Agro LLC, the courts upheld the recovery of more than UAH 708 million from company executives whose actions were connected with transferring funds through transactions unsupported by actual supplies. At the same time, liability was not imposed on a shareholder who owned 33% of the company’s share capital because there was no evidence that she participated in management or approved the relevant transactions. Corporate status, therefore, cannot substitute for evidence of a person’s specific conduct.

Liquidation of the Debtor Does Not Necessarily End the Matter

The most significant development for creditors is that the termination of a legal entity is increasingly less likely to be regarded as an absolute obstacle to protecting an infringed right. Where a company was used as a technical vehicle, assets were transferred within what was effectively a single economic group, and a particular controlling person derived the economic benefit from those transactions, that person’s own conduct may become the subject of litigation. In such circumstances, the legal basis of the claim differs from an ordinary attempt to recover a corporate debt. The creditor is not seeking to establish that the owner must automatically pay the company’s debts. Instead, the creditor seeks to demonstrate that the owner’s own actions constitute an independent basis for personal financial liability.

This distinction is decisive. The doctrine of piercing the corporate veil does not abolish the principle of limited liability and does not turn a business owner into a guarantor of every corporate obligation. It operates as an exceptional mechanism where the company’s separate legal personality is used contrary to the principles of good faith and as a means of avoiding legitimate obligations.

For creditors, this means changing the focus of work with distressed debt: it is necessary to examine not only the assets of the formal debtor but also the structure of the corporate group, movement of funds, the actual centre of decision-making and the persons who ultimately received the economic benefits.

For business owners, the conclusion is the opposite: a complex corporate structure does not by itself insulate personal assets from risk if it can be established that legal entities were used not as independent business undertakings but as instruments for transferring assets and leaving debts with creditors.