Generally speaking, when we think about the liability of a limited company, the plaintiff may focus only on the property or assets of the legal entity with a common understanding that we could not reach the individual shareholder’s asset. There is nothing wrong with this perception and we would say that is totally right however, there are exemptions under Thai Law. Our H&P lawyers in Thailand have prepared some preliminary legal comments on key new updates on this.
As we know the limited company is considered as a separate entity from its shareholder and the liability of the shareholder is limited to the number that they agree to invest. This protection is primary benefit of the shareholder for doing business in the corporate form. If you are in the shareholder’s position, you would appreciate those principle. However, what if you are suing a company for a breach of your contract, and unfortunately, you have found that the company does not have any asset left? You may question whether the shareholder in Thailand will be completely protected in all circumstances?
Recently, the Constitutional Court of Thailand had a decision confirming that the shareholder can be sued in a particular case. This ruling was held in Constitutional Case number 4-5/2562, dated on April 10th, 2019. The Constitutional Case arose from the objection of shareholders, two of the defendants who were sued in the Civil Case number Phor Bor. 515/2561 and number Phor Bor. 956/2561 for the breach of the sale and purchase agreement.
According to the civil cases, the plaintiff sued the shareholders to be jointly and severally liable for the debts and obligations of the company in a civil case, by claiming its right to sue the shareholders under section 44 of the Consumer Case Procedure Act, B.E. 2551 (2008)[1]. The shareholders thus subsequently filed the objection to the Constitutional Court, claiming that section 44 of the Consumer Case Procedure Act, B.E. 2551 (2008), is contrary to or inconsistent with the right under section 37 and section 26 of the Constitution[2].
The shareholders claimed that section 37 of the Constitution provides the protection for individual’s property and section 26 prescribes that the powers of state shall be limited by law, not contrast with the rule of law and not disproportionately increase a burden or restrict the rights or liberties of a person. Whereas section 44 provides that the individual could be jointly liable with the company’s debt due to its shareholder’s status and this section also imposes the burden to the shareholder to prove that it does not involve with the company’s actions. Moreover, section 44 contrast to the Civil and Commercial Code providing that a shareholder in a limited company should be liable only to the outstanding amount for the value of shares held. Pursuant to section 44, the shareholder therefore shall be liable in an amount exceeding its investments and this section thus contrast to principle of proportionality under section 26 of the Constitution[3]
However, the shareholders’ claims were declined. The Constitutional Court held that section 44 of the Consumer Case Procedure Act, B.E. 2551 (2008) is not contrary to or inconsistent with the right under section 37 and section 26 of the Constitution. The rationale is that the Consumer Case Procedure Act, B.E. 2551 (2008) was enacted to support the consumer in the lawsuit between consumer and business entity.
Typically, the consumer is in disadvantageous position because the company always has more bargaining power and capacity to proceed the lawsuit. If the civil procedure is applied to the consumer case, it would be unfair to the consumer as the civil procedure was enacted to be used in the lawsuit that both parties are in the equal position.
The Court further reasoned that the company is set up easily, however, the corporate law system could not completely control the operation of the entity. Therefore, in some cases, the company would be simply the dummy of individual to avoid performing obligation under the contract.
The Consumer Case Procedure Act, B.E. 2551 (2008) Act therefore applies the “piercing the corporate veil principle” in trial to set aside the separation of the individual from entity and allow plaintiff to sue shareholder. However, section 44 is merely the presumption. The plaintiff shall prove that the company is incorporated or acts in bad faith, or has a deceitful behavior against Consumers, or there is an embezzlement of the company’s property to become beneficial to shareholder, and the company’s property is insufficient to satisfy the obligation under the contract.
In other word, it shall appear to the court that the company is a part of the scheme used by individual to cheat or harm other parties with an interest in corporation’s separateness. As the presumption, the shareholder therefore has a chance to prove its noninvolvement.
Notwithstanding, H&P lawyers would like to explain that we could not claim the right under section 44 in all cases. This is because, in Thailand, the principle of piercing the corporate veil under section 44 is applicable to only the consumer case[4] which refers to the case that one party is the entrepreneur and another is the consumer i.e. the case related to the breach of sale and purchase, lease, contractor agreement.
However, the tort or family case, case within the jurisdiction of the specific court i.e. the international transaction case under the jurisdiction of the Central Intellectual Property and International Trade Court or any cases which none of parties are entrepreneur or both parties are entrepreneur, are not the consumer case. As a result, the plaintiff could not claim the right under section 44 to sue the shareholder.
If you need to speak with a Thai lawyer on the liabilities of a shareholder in dispute resolution and litigation in Thailand, please contact H&P lawyers in Bangkok at [email protected]
Notes:
[1] Section 44 “…In a case which a Business Operator against whom the legal action is brought is a juristic person, if it appears that such juristic person is incorporated or acts in bad faith, or has a deceitful behavior against Consumers, or there is an embezzlement of the juristic person’s property to become beneficial to any person, and the juristic person’s property is insufficient to satisfy the obligation as per the plaint, upon the request of a party, or if the court thinks fit, the Court shall have the power to summon partners, shareholders, or person having the power to control the operation of the juristic person, or the person receiving property from such juristic person to be the joint defendant, and shall have the power to adjudicate that such persons be jointly liable for the obligation owed to the Consumer, unless such person proves his or her innocence in such act, or in case of person receiving property from such juristic person, proves that he or she acquires the property in good faith and for value..”
[2] Section 37 “…A person shall enjoy full liberty to profess a religion, a religious denomination or creed, and observe religious precepts or commandments
or exercise a form of worship in accordance with his belief; provided that it is not contrary to his civic duties, public order or good morals.
In exercising the liberty referred to in paragraph one, a person shall be protected from any act of the State, which is derogatory to his rights or detrimental to his due benefits on the grounds of professing a religion, a religious denomination or creed or observing religious precepts or commandments or exercising a form of worship in accordance with his different belief from that of others…”
Section 26 “..The exercise of powers by all State authorities shall pay due regard to human dignity, rights and liberties in accordance with the provisions of this Constitution…”
[3] Constitutional Case number 4-5/2562, dated on April 10th, 2019
[4] Consumer Case Procedure ACT, B.E. 2551 (2008) Section 3. In this Act: “Consumer Case” means (1) a case between a consumer or a person having the power to file a lawsuit on the consumer’s behalf under section 19 or as per other law and an entrepreneur having a dispute in relation to a legal right or obligation related to consumption of goods or service; (2) a civil case under the law relating to liability for damage arising from unsafe goods; (3) a civil case relating to case under (1) or (2); (4) a civil case which a registration prescribing to apply the procedure under this Act;
