Disregard doctrine in Brazil: Effects on D&O insurance
Published 1 October 2015
In Brazil, corporations are separate legal entities and the liability of company officials in a corporate structure is, as a general rule, limited. There are exceptions to this general rule, however, in cases such as frauds against creditors, violations of law or gross mismanagement. Such acts may permit the court to disregard the corporate entity ("disregard doctrine") and hold the directors and officers personally liable to meet financial damage.
Article 50 of the Brazilian Civil Code provides that if the actions of a director cause a deviation from the company's purpose or result in the commingling of assets, the court may find the director personally liable for the company's obligations and debts. Article 28 of the Consumer Protection Code also sets out a comprehensive code permitting the corporate veil to be pierced where consumers' interests are in issue.
The Brazilian courts have frequently applied the "disregard doctrine" in labour, tax, consumer protection and insolvency cases.
The challenge is how to protect directors and officers against personal exposure when the veil is lifted. Some D&O policies offer specific cover for directors and officers in cases where, for example, personal and business assets are mixed, conflicts of interest have not been disclosed, or the directors are being investigated. The D&O policy will not, however, cover the directors' liability to pay civil penalties or meet unpaid company debts, and cases of fraud will be excluded.
One difficulty with the application of D&O insurance in Brazil is that the policy wording often requires the wrongful act to have been committed by directors or officers specified in a legal claim (i.e. the conduct must be personalised). Problems can arise when the Brazilian courts order the corporate veil to be lifted on a generic basis without naming the specific directors and officers that acted wrongly. The court order applies to all directors and officers — and this is not uncommon in Brazil.
Further complications can arise when the Consumer Protection Code applies; this Code does not require the director's or officer's conduct to be analysed when deciding whether to lift the corporate veil of a legal entity. In such cases, since the management's conduct is not analysed, the individual official's conduct is also not considered and this can make it difficult to apply and satisfy the D&O policy definition of "Wrongful Act".
D&O insurers operating in the Brazilian market need to appreciate these local differences and the resulting difficulties, and ensure that their product properly responds and restricts the personal exposure of directors and officers in situations where the corporate veil has been lifted. In view of these peculiarities, we recommend carefully adapted policy wording is prepared for the Brazilian D&O market.