Piercing the ‘Corporate Veil’ — Mongolia

In its Spring newsletter, CONSULEGIS International Litigation & Arbitration Specialist Group presented an abbreviated overview of 23 jurisdictions’ legal views on the topic of when courts may disregard a corporate entity to make owners of the entity personally liable for the debts of the entity—what is commonly thought of as “piercing the corporate veil”.

Among the contributors to writing on the topic are five legal advisors from Horizons addressing six countries’ legal points of view, including China, Korea (DPRK), Mongolia, Qatar, Russia and Pakistan. In this post, we offer the entry on Mongolia.

MONGOLIA
Suvd-Erdene Baatar | Legal | Horizons Mongolia

The Company Law of Mongolia addresses two forms of business entities, the Limited Liability Company (LLC) and a Joint Stock Company.

Related to the question of when courts may disregard corporate structures to make owners personally liable, there are two concepts to keep in mind: company structures, the initial structuring of a company, and structural changes made to an existing company.

The company’s owner(s) have the right to initiate structures and make changes and/or amendments to structures of a company. Those shall be approved by shareholders in a formal meeting. The structures of the company are divided into two categories, which are a governance structure and an institutional structure.

A governance structure shall be specified in a Charter of Company when it is registered by the Registration Office (RO) of Mongolia. It is related to the structures of the shareholder meeting, Board meeting and executives. The company documents will have been reviewed by an officer of the RO determining its compliance with laws. Therefore, there is little chance that problems will arise out of this structure. In the event that a complaint is made before the Court, a judge considers and determine whether compliance with the Company Law, a Charter of Company and procedures of shareholders meetings have been met.

An institutional structure of Company is not required to register with the RO, but must be approved by the shareholders to enact any changes in its structure related to the internal departments and units.

When a Company commences operations after its official registration, the courts may disregard the owners’ right to make changes to its structures under the following circumstances:

• If the Company owners are running an illegal business within the territory of Mongolia. For example, dealing in narcotics, marijuana, pornography or under false pretences marketing with a pyramid scheme.

• In the event that planned actions of a business have caused direct and indirect harm to the public health and environment.

• The business is in breach the Laws or the governing document of an LLC, which includes the Company Charter and Shareholder’s Agreement (in the event there are more than two shareholders).

• Any changes or amendment of a Company’s governance structure has not been registered with the RO after approval of the shareholders.

• Any changes or amendment of the institutional structure has not been approved by the shareholders.

• The Company owes large debts related to tax, social insurance or third parties.

In summary, it is simply human nature that a Company works to avoid situations that may cause it problems. Still, some shareholders/owners of large-scale companies may “lose their way” when enacting structural change. They then may drift into ill-advised areas that take them outside of the lines mandated by the Law. In this event, the court can impose liability.

Suvd-Erdene Baatar is Horizons Mongolia desk head. If you would like to talk with a specialist about corporate liability in Mongolia or other countries, email us and we’ll have a Horizons professional contact you.