Civil and Criminal Liability in the Context of Piercing the Corporate Veil

Introduction

Although company members and management board members are generally not liable for the obligations of the company, there are legal provisions in place to protect creditors from the abuse of this rule. Both company members and management board members may be held liable for the company’s obligations, albeit on distinct legal grounds. Liability applies equally, irrespective of whether the individuals are domestic or foreign persons, as their residency status has no bearing on the scope or nature of their potential liability. Creditors have at their disposal additional legal remedies beyond the liabilities provided for in the Companies Act and the Criminal Code. Notably, various forms of security instruments can be used to prevent or mitigate malicious conduct by debtor companies and their members or management. Furthermore, creditors may initiate legal proceedings to annul legal transactions made to their detriment, thereby effectively reversing certain forms of abuse by company members or management board members. In conclusion, creditor protection in the Republic of Croatia is broad and comprehensive, offering multiple legal instruments to safeguard against malicious and fraudulent conduct within companies. It is also evident that the limitation of liability for company members and management board members is not absolute.

1. General Rules

The Croatian Companies Act (Official Gazette Nos. 111/93, 34/99, 121/99, 52/00, 118/03, 107/07, 146/08, 137/09, 152/11 – consolidated text, 111/12, 125/11, 68/13, 110/15, 40/19, 34/22, 114/22, 18/23, 130/23, 136/24) (hereinafter: Companies Act) defines the legal personality of companies, as well as the liability for corporate obligations. A company acquires legal personality upon its registration with the court register, which marks the moment of its incorporation. From that point onward, it may acquire rights and assume obligations in legal transactions. The company is liable for its obligations with all of its assets.

The fundamental rule is that members of a limited liability company (including the simplified form), shareholders in a joint-stock company, and limited partners in a limited partnership are not personally liable for the company’s obligations. This principle reflects the commercial rationale behind company formation and clearly illustrates the legislator’s intention to distinguish the legal personality of the company from that of its founders (commonly referred to as "owners").

The most common form of company in Croatia is the limited liability company, which accounts for over 70% of all companies in the country. When including simplified limited liability companies, this figure exceeds 95%. Accordingly, the provisions governing the liability of company members in limited liability companies (and simplified limited liability companies) are significant and constitute a compelling incentive for entrepreneurs to incorporate.

Nevertheless, there are circumstances under which both the founders and the management board members may become liable for the company’s obligations. In this regard, it is irrelevant whether the founders or board members are domestic or foreign natural or legal persons, as the legal bases for their liability apply uniformly, regardless of their residency.

2. Exception to the Rule that Company Members Are Not Liable for Company Obligations

To prevent potential abuse of the rule that company members are not liable for corporate obligations, the Companies Act provides specific exceptions. It is conceivable that a managing director, who is also the founder of a company, might manage the company in such a manner that it allows them to personally acquire the company’s assets, leaving the company devoid of assets and its creditors unable to satisfy their claims. Such conduct would damage creditors and could potentially lead to the company’s insolvency. In this scenario, the director (i.e., the founder) would be exploiting the company for personal gain while remaining shielded from liability by the aforementioned rule.

To address such abuses, the legislator has established exceptions to the general rule and stipulated the circumstances under which a member of a company may be held personally liable for the company’s obligations.

Article 10(2) of the Companies Act provides that a person who abuses the fact that they are not liable for the company’s obligations as a member may not invoke such lack of liability. A member's liability (i.e., piercing the corporate veil) may arise if any of the following legal conditions are met:

The company is used to achieve a purpose that is otherwise prohibited;
The company is used to defraud creditors;
The company’s assets are managed as if they were the member’s personal assets, contrary to law;
The member reduces the company’s assets for their own benefit or the benefit of another, knowing or having reason to know that the company will not be able to meet its obligations.
It is apparent that the scope of member liability is relatively broad. While the above provision lists specific instances in which members may be held liable, these examples are not exhaustive. The Companies Act does not restrict liability only to those cases. Rather, the determining factor is the abuse of Article 10(2) of the Act.

The identification of such abuse falls within the jurisdiction of the courts, which interpret such conduct in accordance with the spirit of the law and with reference to Article 10(4) of the Companies Act, which provides additional guidance as to what constitutes an abuse. However, the burden of proof lies with the creditor – that is, the plaintiff – who must prove the facts giving rise to the member’s liability, specifically the facts underlying the alleged abuse of rights by the member.

3. Liability of Management Board Members

In addition to the above-described liability of company members, liability for a company’s obligations may also extend to its management board members. The Companies Act primarily regulates the liability of management board members toward the company itself (Article 252), whereby liability is attributed to the member personally, distinct from their role as a management board member. This section of the Companies Act primarily governs the conduct of management board members, obliging them to manage the company’s affairs with due care and diligence. This means that, when making a business decision based on adequate information, it must be reasonably assumed that the decision is made in the best interest of the company.

Furthermore, the Companies Act stipulates that, if a management board member breaches this duty, they shall be liable to the company for any damage caused. This establishes liability toward the company as a legal entity managed by the board member, whose interests the member is obliged to protect. However, this liability should be interpreted narrowly, as not every poor or inadequate business decision made by a board member can automatically be classified as a breach of the duty to act diligently and conscientiously—this is both reasonable and consistent with practical realities.

While this liability primarily concerns the company itself, Article 252(5) of the Companies Act also enables the company’s creditors to assert the same claim directly against the management board members, provided the creditors are unable to recover their claims from the company. This provision effectively creates a direct path for creditors to hold management board members personally liable. Thus, even where mismanagement or willful misconduct renders the company insolvent, leaving creditors unable to satisfy their claims, a direct legal avenue exists to pursue recovery from those responsible.

When considered in conjunction with the previously discussed liability of company members, the liability of management board members provides creditors with an additional mechanism to recover claims directly from the responsible individuals, again bypassing the general rule that individuals within the company are not liable for its obligations. In practice, it is common for the same person to act both as a company member and a management board member, in which case creditors effectively have two legal bases for action against the same individual in seeking to recover unpaid claims, which would otherwise remain unrecoverable due to the conduct of the involved persons.

Nonetheless, it is important to distinguish between these two forms of liability so that creditors may choose the most appropriate course of action. While member liability is based on abuse of legal form or specific malicious acts designed to harm creditors or unlawfully increase the member’s personal wealth, management board liability arises from a failure to conduct the company’s affairs with due care and diligence. This means that malice or intent is not a necessary element—though it may be present.

Another distinction lies in the fact that, under the piercing of the corporate veil doctrine, members become liable for the company’s obligations, whereas under the liability of management board members, they are liable for damages, which do not necessarily correspond to the creditors’ claims, as the claim belongs to the company itself.

4. Criminal Offences Related to the Liability of Company Members and Management Board Members

Abuse of Trust in Business Transactions – This offence concerns the breach of duty to protect another’s proprietary interests, resulting in unlawful financial gain and damage to the injured party. In relation to the aforementioned civil liabilities of company members and management board members, it must be noted that these individuals are legally obligated to safeguard the interests of the company. Frequently, where grounds for civil liability exist, there may also be grounds for criminal liability (although not always), as such individuals may harm creditors by rendering the company insolvent in a way that prevents creditors from recovering their claims. For criminal liability to be established, however, it is essential that damage to the company occurred, that the responsible person benefited financially, and that they violated their statutory duty to protect the company’s interests—elements that are not always present in cases of civil liability.
Fraud in Business Transactions – Similar to the above, this offence often correlates with the liability of company members and management board members, particularly where these individuals mislead creditors (e.g., by presenting the company as solvent and financially stable).
Causing Bankruptcy – This criminal offence specifically targets the conduct that forms the basis for the aforementioned civil liabilities. When individuals lead the company into insolvency with the intent to defraud creditors, the inevitable consequence is the initiation of bankruptcy proceedings due to the company’s inability to meet its obligations. This type of creditor harm is criminalized by this offence and closely aligns with the forms of liability previously discussed.
Preferential Treatment of Creditors – This offence arises when a company, while knowing it is insolvent and unable to meet its obligations, satisfies the claim of a particular creditor who has no right to such payment in that manner or at that time, thereby prejudicing the rights of other creditors.
 

LEGAL SOURCES:

Companies Act (Official Gazette Nos. 111/93, 34/99, 121/99, 52/00, 118/03, 107/07, 146/08, 137/09, 152/11 – consolidated text, 111/12, 125/11, 68/13, 110/15, 40/19, 34/22, 114/22, 18/23, 130/23, 136/24)
Criminal Code (Official Gazette Nos. 125/11, 144/12, 56/15, 61/15, 101/17, 118/18, 126/19, 84/21, 114/22, 114/23, 36/24)
Civil Obligations Act (Official Gazette Nos. 35/05, 41/08, 125/11, 78/15, 29/18, 126/21, 114/22, 156/22, 145/23, 155/23)
 

Prepared by Borna Rokvić, Attorney Trainee

Reviewed and edited by Anja Juršetić Šepčević, managing partner