Incorporation of commercial companies - "Substantial plurality of partners"

Room E of the Commercial Court of Appeals confirmed on May 3, 2005 the resolution of the Public Registry of Commerce of the City of Buenos Aires (Inspección General de Justicia) (“PRC”) that denied the incorporation and registration of the bylaws of "Fracchia Raymond S.R.L." until the so called "substantial plurality of partners" was restated. The PRC repeated therefore the criterion sustained in its previous precedents ("Jassler S.A.", "Bosques Verdes S.A.", "Vitamina Group S.A.", "ES.PE.VER S.A.", "Tierras y Haciendas S.A.", and "Coca-Cola Femsa S.A.").

The company Fracchia Raymond S.R.L. was incorporated with an initial capital of $ 10,000, distributed between its two partners in the proportion of 99.9999% and 0.0001%. The partners acknowledged in their filings before the PRC that the company was being incorporated to structure a unipersonal real estate business of the majority partner, and that it had resorted to the limited liability company type, with the objective of limiting the liability of the majority partner.

The PRC denied its registration considering that it was before the case of a so called convenience ("cómodo”) company, that did not fulfill the requirement of the substantial plurality of partners, which the PRC considers essential for the incorporation of a commercial company. The company appealed the resolution. Nevertheless, the interpretation of the PRC was confirmed by Room E of the Commercial Court of Appeals.

Room E indicated that to resort to the “company” figure to benefit from the limited liability in a single-person business demonstrates an abusive and diverged practice of the legal resource. Nor did it consider applicable to the case the figure of the "indirect business" (negocio jurídico indirecto), by means of which an oblique way is taken in order to pursue a certain objective, because it was expressly acknowledged that there had been no associative will for a common business, and the incorporation of any company requires precisely serious and real contributions (i.e., "substantial plurality of partners").

From reading the case, it emerges that Fracchia Raymond S.R.L. itself "expressly acknowledged that the company constituted a single-person business, and that the company figure only pursued to limit the liability of its sole partner".

This acknowledgement of the company itself, by virtue of the doctrine of own acts, obviously facilitated the task of the Court to solve a complex and non-smaller issue, as far as its effects, for the business world.

This case-law renews legal scholars’ discussions on the so-called convenience companies. These refer to individual businessmen or women who act through the company figure, and the necessity in Argentina to count on a legal regime for the single-person companies, already included in the first draft of amendment of the Commercial Companies Law, which is currently under analysis. Although the new case-law refers to the incorporation of new companies, as long as “the substantial plurality of its members" is not restated it surely mention as precedent in those judgments where companies that are already incorporated partake denominated as “99/1%”, to maintain that they are “simulated", "null", "fictitious" or "nonexistent", in order to address, either directly or indirectly, claims against the majority shareholder or partner.