Insolvency liability of the natural and legal person

Brief Introduction.

In Spain:

In 2017, 48% of Stock Corporations and 74% of Limited Companies are “single-membered”.

2014’s LSC (our Trading Companies Law) modification constituted a change of paradigm. It established, through article 236.5. LSC, a system of joint and several liability of the individual administrator. This system filled a legal gap.

Outside Spain:

The legal entity is not allowed to be an administrator, neither in the USA, nor in Germany or the UK.

In France, the members of the board of directors or administrator are required to be partners.

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Liability of the natural person (representative of the Legal Entity) in the Bankruptcy Procedure.

Is this natural person affected by the qualification of the Bankruptcy Procedure?

There are two theses, being the Supreme Court Jurisprudence the one that will establish the definitive criterion.

Integrative Thesis:

Article 236.5. LSC can be applied to the Legal Entity (Joint and several liability of the Natural Person with the Legal Entity). Thus, preventing the Legal Entity from constituting an artifice to avoid responsability. If he is subject to the duties as an administrator, it is reasonable to think that he must be affected in the Bankruptcy Procedure are.

The Provincial Court Ruling (SAP), September 13th, 2017, applies this thesis.

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Relevant accounting irregularities

Accounting irregularities are those that do not allow the financial or asset situation to be understood or known. In other words, the accounting irregularity has to be of such a magnitude that it prevents the accounting from contributing what is expected of it in the commercial trade.

Dissociative thesis.

The reasons that follow this thesis that dissociates the responsability of the Legal Entity and the Natural Person are:

• Our Bankruptcy Procedure Law (LC) talks abou an administrator and not other entities. Thus, it does not mention anything about the natural person.
• Trading Companies Law is not a general law; it is a special law.
• The location of the scope of liability in article 236.5. LSC is deficient. This, since it’s not located within the regime of the legal entity administrator; it is located within the regime of the challenge actions.
• If there is no regulatory coverage in the Bankruptcy Procedure, liability cannot be extended.
• It’s not consistent with article 4 of our Civil Code. Rules shall be applied by analogy when they do not contemplate a specific case, but regulate another similar case in which the reason is the same.
• Jurisprudence (AP of Madrid) operates in the corporate field but not in the Bankruptcy Procedure field.
• Liable subjects in LSC (except for de facto and de jure administrators) do not coincide with the LC ones. It seems the Bankruptcy Procedure legislator lives with hus back turned to the corporate legislator.

It is true the Supreme Court Justice Ignacio Sancho Gargallo has already ruled in favor of the Integrating Thesis.

Can the general representative be an affected subject?

As a general principle, only when his or her management capacity is very general and with hugh level of responsability. This is, with a role that can be assimilated to that of a Senior Manager. Although not a full one, as in this case we would be dealing with a de facto manager. In this case, the general representative could be an affected subject.

What conducts can he be blamed for?

We must analyze at least two aspects:

• The legal entity must be liable for the conduct of the natural person, since the individual was its representative. However, if the individual has not followed its instructions, the legal entity will not be liable. The main principle is that the legal entity is liable for the natural person conduct.
• There are certain behaviours, such as some of those typified in article 164 and 165 of the LC, that are specific to the legal administrator. This is the case of accounting duties, presentation of manipulated accounts or financial statements…

Is the Natural Person liable for everything in the Bankruptcy Procedure field?

Let’s analyze the options:

• Disqualification from administering other people’s assets:

Our Jurisprudence is divide. In fact, Magistrate Sancho-Gargallo maintains that this disqualification only proceeds against the natural person and not the legal entity.

• Loss of rights recongnized as Bankruptcy Procedure’s creditors:

Doctrine is still divided: Some authors think both, and some that only the legal person.

• Return of assets and rights.

Both natural and legal person.

• Damages and Losses.

Ambos (Persona Física y persona jurídica).

Both natural and legal person.

• Responsabilidad por déficit.
• Liability for déficit.

Both natural and legal person.

Conclusion.

• There are some issues in which the doctrine and the jurisprudence still disagree.
• It will be our Supreme Court that will resolve these discrepancies.
• The tendency is to make both natura land legal person liable.

Recommended reading

Company Dissolution: Directors’ Duties and Liabilities