Piercing the Corporate Veil in Iran

It is often posited that limited liability companies were one of the most significant innovations of the modern era which made the capitalist revolution possible. Through them, investors could full-heartedly venture into new investments without the fear of losing everything; because, their liability would be limited to the amount of their share in the company. Shareholders or directors of a company could not be made responsible for the debts incurred by the company, because shareholders have a limited liability and companies have a separate and independent legal personality. This concept is often referred to as “corporate veil” as though a thick veil separates a company from its directors and shareholders and it is very difficult to pierce this veil.

In western legal systems, the possibility of piercing the corporate veil is a rare exception; however, in Iran, as we shall see, this possibility is not so exceptional and at least when the public purse is concerned, directors of a company are held liable for the debts incurred by the company.

For instance, directors of the company are held to be jointly responsible for the debts the company owes to the banking system. The directors are also held liable for social insurance of the company’s employees. If an employee is not properly insured or if the relevant premiums are not paid by the company, the directors will have a joint liability. Also as understood from article 198 & 202 of Direct Taxation Code, directors of the company are jointly responsible for taxes owed by the company and even a writ of no exeat could be issued against them.  As understood from articles 23 & 26 of the Law regarding the Method of Enforcement of Civil Sentences (2015), the writ of no exeat against a director of a company could even be issued as a result of a private litigation against the company. However, this liability is still open to interpretation and it appears that directors’ liability for the company’s private debts will be limited to situations were a wrongdoing was committed by the director(s). In addition to all that, in certain situations, directors might find themselves criminally responsible for the wrongdoings committed by the company. However, as criminal responsibility is construed narrowly, this requires a criminal intent by the director and his direct involvement in the criminal act.

A pertinent question regarding the liabilities introduced above, is what we mean by the word “director”? are these liabilities limited to the CEO or Managing Director or the members of the Board of Directors shall be liable as well? The Text of the relevant laws and regulations use a general terminology and do not distinguish between MD and other directors; therefore, the general understanding is that the liability extends to the members of the board of directors as well. Only in one instance, the Administrative Court of Justice (ACJ) had the occasion to limit the liability. Regarding the writ of no exeat issued against directors of a company for the tax liabilities of companies, the text of article 202 of Direct Taxation Code speaks of “responsible Directors”. ACJ has interpreted this to mean authorized signatories. According to this binding decision the writ of no exeat as mentioned in Direct Taxation Code, could only be issued against those directors who have a signing power (decision No. 736). Although this is a welcome development as it limits the liability of the directors, it is also somewhat of an oddity. An authorized signatory need not to be a director. What if none of the directors of a company have the signing power? Can the directors avoid liability by assigning the signing power to other persons? The second question is: what signing power? According to ACJ decision, those directors who have the signing power relevant to the taxation of the company could be barred from exiting the country. The language is vague. Does this mean the person who is authorized to represent the company before the tax authority or the person who has the signing power regarding the company’s financial dealings?

In shortas regards the directors of a company, the corporate veil in Iran is not as thick as in some western countries and being appointed as a director comes with great responsibilities which should be considered before accepting.

Submitted by Dr. Shahin Fadakar  & Dr. Mahnaz Mehrinfar