In a press release, the First Chamber of the Supreme Court of Justice of Mexico confirmed that piercing the corporate veil of a corporate entity will not be permitted when requested as a precautionary remedy. [1]
This sheds light on the limitations surrounding requests for such a remedy.
What Does the Corporate Veil of a Company Entail?
Two of the most common types of companies today—the limited liability company and the limited liability stock corporation—share a common characteristic: their members or shareholders are only liable up to the amount of their respective capital contributions or shares of stock.
This principle provides legal certainty to entrepreneurs and investors who choose to become a member of a commercial entity. In the event the business fails, the personal assets of the members or shareholders remain protected, as they are distinct and separate from the company’s assets.
This legal separation of company assets from those of its members is referred to as the corporate veil. Consequently, disregarding this veil allows third parties who do business with the company to examine “its personal aspects, purposes, strategies, incentives, results, and activities, to seek a substantial identity… and see if it is feasible to establish the existence of a specific pattern of behavior behind the appearance of a diversity of legal capacities.” [2]
Piercing the corporate veil also entails scrutinizing the inner workings of the company [3] and, in the most extreme cases, holding shareholders personally liable—not only through their capital contributions to the company but also through their individual assets.
Therefore, breaching this boundary between personal and corporate assets must be reserved for exceptional cases.
In What Cases Is It Possible to Pierce the Corporate Veil?
Mexican federal courts have ruled on various cases in which corporate practices have justified piercing the corporate veil.
For example, when a company is used as an instrument to perpetrate fraud, circumvent the law, or engage in abusive practices that harm third parties.
Courts have also authorized this exceptional measure to assess whether the company has engaged in monopolistic or anti-competitive practices, in accordance with the relevant competition laws.
Additionally, contracts entered into by companies within a corporate group may be closely scrutinized, especially when subsidiary companies enter into agreements under the control of a parent company in violation of the principle of contractual good faith. [4]
Likewise, the corporate veil may be pierced when a company is used to defraud creditors or evade the application of the law. [5]
The above are just a few examples of the reasons why a judge may instruct to pierce the corporate veil of a corporate entity. This is based on some court criteria.
In What Cases Is It Not Permitted to Pierce the Corporate Veil?
As I indicated above, this measure must be fully justified and applied exceptionally.
The separation of the partners’ assets from the company provides them with the peace of mind that, under normal conditions, the actions taken by the company of which they are a part will not affect or harm them, beyond the potential loss of their contributions made.
This fundamental pillar, which is not only inherent to Mexican law but also recognized in other jurisdictions and countries, encourages the injection of private capital and the strengthening of the local economy. Otherwise, investors, entrepreneurs, and merchants would choose to do business in their own name and on their own account, with all the risks inherent to such a situation.
The corporate veil must be supported by a legal system aimed at encouraging investment, job creation, and the strengthening of various economic sectors
Therefore, its piercing must be strictly limited to exceptional cases. This is because such a measure may have effects contrary to the legal certainty granted by the separation of estates, not only for the company itself but also for its partners or shareholders, even if they are part of the same corporate group.
For Mexico’s Supreme Court, before authorizing piercing the corporate veil, the judge must take into account not only objective elements but also subjective ones.
That is, it is not enough to consider the legal incorporation and existence of the company, the existence of a debt, or the breach of an obligation. The judge must also consider subjective elements, such as evidence that the company was incorporated with the purpose of defrauding third parties or that the company’s partners used it as a mere screen or facade to conceal acts of simulation or to break the principle of good faith.
Therefore, the First Chamber of the Supreme Court of Justice held that, as a general rule, piercing the corporate veil as a precautionary remedy shall not be appropriate, since by its very nature it is adopted without having granted the affected party the opportunity to be heard, even though such opportunity may be granted at a later stage.
There must be conclusive evidence of the necessity of applying such measures and, consequently, of disregarding the legal capacity of the commercial company. [6]
Final Comments
Piercing the corporate veil is a measure that a judge may use, provided that both the objective elements and the subjective considerations referred to by the Court have been taken into account in order to authorize it. But as an exceptional measure, its use must be limited.
I agree with the Court’s decision in the sense that this measure must be fully justified—especially at a pre-trial stage in which the affected party has not been granted the right to be heard. That is, among other things, the affected party must be allowed to defend itself prior to the judge’s instruction to apply the measure.
What is your opinion regarding this Court decision?
You may find the Court’s press release here:
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- Precautionary remedies are measures that may be authorized by the judge at the request of the interested party in order to prevent harm that could render it impossible to enforce a potential judgment in favor of the requesting party.
- Thesis I.4o.A. J/70. Weekly Federal Court Report and its Gazette. Volume XXVIII, November 2008, page 1271. Digital Reg. 168410.
- Thesis I.5o.C.75 C (10a.). Weekly Federal Court Report and its Gazette. Book XXIII, August 2013, Volume 3, page 1748. Digital Record 2004356
- Thesis I.4o.C.18 C (10.a.). Weekly Federal Court Report and its Gazette. Book XIV, November 2012, Volume 3, page 1941. Digital Record 2002201
- Thesis I.5o.C.72 C (10.) Weekly Federal Court Report and its Gazette. Book XXIII, August 2013, Volume 3, page 1750. Digital Record 2004359
- Constitutional lawsuit (Amparo en revisión) 266/2023. Drafting Justice: Loretta Ortiz Ahlf. Resolved in the session of September 12, 2024, by a majority of three votes.
