Two Danes established Centros Ltd under UK company law. The company was trade only in Denmark, however. The incorporators clearly stated that they had established the entity under UK company law solely to avoid the minimum capitalisation requirement for Danish limited liability companies. The Danish commercial registry considered this to be an unlawful circumvention of the Danish minimum capitalisation rules and so refused to register the company’s branch office in Denmark .

EC law implications

Once again the question of compatibility with the provisions on freedom of establishment (Articles 43 and 48 EC Treaty) are at stake. In particular the question was referred to the ECJ whether it is compatible with freedom of establishment to refuse registration of a branch of a lawfully founded company that has its registered office in another member state, but in which the company does not itself carry on any business.

Decision of the court

First, the ECJ ruled that where a company exercises its freedom of establishment under the EC Treaty, the Member States are prohibited from discriminating against this company on the ground that it was formed in accordance with the law of another member state in which it has its registered office but does not carry on any business. Second, a state is not authorised to restrict freedom of establishment on the ground of protecting creditors or preventing fraud if there are other ways of countering fraud or protecting creditors. Besides, the Court points to the availability to member states of the option of adopting EC harmonising legislation in this area of company law. In this leading case the ECJ took quite a liberal approach in the context of company rights. Moreover, the Court considers the conditions governing abuses of EC law restrictive.