Bernhard Rieder
DORDA Rechtsanwälte, Vienna
​​​​​​​bernhard.rieder@dorda.at

Facts of the case

An English-law private limited company with a branch in Austria brought a civil action in Austria. The company had its registered seat in England but its administrative headquarters in Austria. No director or shareholder was ever domiciled at the (founding) registered office of the company in England. The company had a sole shareholder.

The defendant filed a motion to dismiss the action because the claimant had lost its legal capacity and thus its capacity to be a party to the action due to Brexit. Ultimately, the Austrian Supreme Court had to rule on this motion (judgment of 27 January 2022, 9 Ob 74/21d).

Legal assessment by the Austrian Supreme Court

The legal capacity of a foreign legal entity is to be assessed according to its corporate statute. In order to determine the company's statute, Austrian conflict of laws refers to the country of domicile ('seat theory'). However, section 10 of the Austrian International Private Law Act, and with it, seat theory, has been overridden by the freedom of establishment under Articles 49 and 54 of the Treaty on the Functioning of the European Union (TFEU). Accordingly, a company that has been validly established in an EU Member State in accordance with its provisions (here, British limited) is to be recognised in another Member State, irrespective of the place of the actual administrative seat (here, Austria), in the legal form in which it was established. However, from an Austrian perspective, as a result of Brexit, there is no longer any legal reason to recognise the legal capacity of a British limited liability company with its principal place of administration in Austria as such a British limited liability company. The legal form of a limited – which was previously to be recognised as an independent legal entity under EU law, but this basis for recognition has ceased to exist due to Brexit – must therefore, if the registered office of its administrative activity is a domestic registered office, now be regarded as a civil law partnership under Austrian law or, in the case of a sole shareholder, it must be assumed that it is allocated to such a sole shareholder as a sole proprietor.

Comparison with Germany

Comparatively, German case law also assumes that, since Brexit, British limited liability companies can no longer rely on the freedom of establishment under Articles 49 and 54 of the TFEU and, depending on their structure, are to be treated as a civil law partnership, (German) general partnership or, in the case of only one partner, a sole proprietorship (OLG Munich, judgment of 5 August 2021, 29 U 2411/21 Kart).

Unlike in Germany, an Austrian civil law partnership is not a legal entity and does not have legal capacity. The objects of the attribution of rights and obligations are its shareholders, who are also the contractual partners of a third party. In a lawsuit, the shareholders must appear as parties to the lawsuit.

Consequences

The most important consequences are: (1) unlimited liability of the shareholders of the former British limited liability company because such a company is to be regarded as a civil law partnership or sole proprietor; and (2) the transfer of the assets of the British limited liability company to the shareholders of the partnership or sole proprietor. The rights and obligations (including liabilities) of the British limited liability company, therefore, no longer affect such a company but the shareholder(s) personally due to universal succession.

This also has tax consequences: (1) at the level of the company, the hidden reserves in the assets are disclosed and taxed at the 25 per cent corporate income tax rate; and (2) at the level of the shareholder(s), the loss of shares in the British limited liability company is considered as a disposal and results in the 27.5 per cent capital gains tax rate on the hidden reserves contained in the shares.