Is a Company Director responsible for the debts generated when he is not in charge?

Debt liability

The companies administrators are responsible for the social debts after the moment in which the company entered in cause of dissolution. Therefore, the company must have entered first into one of the legal grounds for dissolution. In addition, the administrators must have failed in their duty to promote the dissolution of the company. This duty is specified in the fact that the administrators must:

• Call, within 2 months of the cause for dissolution, a general meeting to agree on the dissolution.
• Request the judicial dissolution or the bankruptcy, if the general meeting has not been held. They have two months from the date scheduled for the meeting. If the meeting is held, but it is against the dissolution, the two months will be calculated from the date of the meeting.

If this duty is not fulfilled, the administrators will be responsible for the social debts subsequent to the appearance of the cause for dissolution.This responsibility will be joint and several with the rest of the administrators. The creditors will be able to claim the totality of the credit both to all the administrators jointly and/or to each one of them individually.

STS 601/2019 of 8 November 2019

Until that instance, the Supreme Court had not  ruled on the liability of the administrator appointed after the debts were incurred. This 2019 ruling resolves the issue with an enlightening decision.

Origin of the problem

The SC, in its STS 601/2019, resolves a cassation appeal filed by the administrator of a company. This administrator had been sentenced to pay the credit that one of the company’s creditors had with the company. The reasoning behind this second instance sentence lied in the infringement of the duty to promote the dissolution of the company.

The administrator appealed in cassation alleging the infringement of article 367 LSC and the jurisprudence that interprets it. He argued that not all the requirements of the mentioned article were met, for the objective responsibility to come into play. Specifically, there were two reasons why he considers that the requirements were not met:

1. The debt incurred by the company is prior to his appointment as administrator.
2. It is necessary to prove that if the dissolution had been promoted, the creditor would have been able to satisfy its credit in whole or in part.

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Can liability action and director’s liability action be joined in the same lawsuit?

Until 2012, the Supreme Court did not rule on the accumulation of two types of shares. The action for liability for debts and the action for liability of administrators.

Rejection of the second argument

The Court dismisses the second reason. It bases its rejection on the fact that the case law cited in the appeal is not applicable to the case. Indeed, STS 253/2016 cited by the appellant imposes the requirement of the connection on which the appellant based his petition. Thus, for the action to proster, the benefit for the creditor in promoting the dissolution must be proven. That is, to demonstrate that if the dissolution would have been promoted, the creditor could have recovered its credit. Now, STS 253/2016 imposes this requirement for an individual liability action. This requirement does not operate when the intention is to exercise an action of strict liability under Article 367 LSC. For the latter, it is sufficient that being the company in a cause of dissolution (1) the administrator fails to promote the dissolution; (2) the debt arises after the cause of dissolution.

Estimation of the first of the arguments

However the SC does consider the first argument given by the appellant administrator in the appeal. There is no doubt that the company entered into a cause of disolution in 2012. From then on, the duties of articles 365 and 366 of the LSC arose for the administrators. These are, as mentioned above, to promote the dissolution through the channels and within the deadlines set. The credit that is the object of the lawsuit originated between November 2013 and March 2014. The credit or debt is thus subsequent to the entry into cause of dissolution of the company. Having failed to comply with the aforementioned duties, there is no doubt that these administrators incur in the responsibility of article 367 LSC.

However, the administrator who raises the appeal is appointed on May 5, 2014. Ceasing in the position on September 9 of the same year. That is, his appointment is subsequent to both the cause of dissolution and the birth of the credit. The appellant argues that this fact exempts him from liability. He could not have failed to comply with the duty to promote the dissolution in due time since he was not yet an administrator. The appellant supports his argument in STS 731/2013. This ruling determines the non liability of an administrator for the debts incurred after his dismissal.

Conclusions

The SC, as we said, upheld the appeal on the basis of the first of the appellant’s arguments. The administrator was appointed after the cause for dissolution appeared and after the debt was incurred. To this end, the Court examined the ratio of Article 367 LSC, i.e., its purpose.

The liability of section 367 LSC is justified in the risk for creditors after the cause of dissolution. The failure to comply with the duties of articles 365 and 366 LSC does not protect the subsequent creditors. The patrimonial guarantee that the company’s assets represented for their credits disappeared without them being aware of it. Therefore, says the SC, the legislator has limited the liability to subsequent debts. This is where the justification for the objective liability for debts of the aforementioned article 367 LSC lies.

For this reason, the Court determines that the trustee will incur into strict liability for debts incurred during his or her term of service. Not those born before his or her appointment or after his or her termination. This Judgment thus completely limits the temporal scope of the liability for debts of the administrators. This task had already been started by the aforementioned STS 731/2013.

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Is the administrator who is unaware of the injury that his or her actions generate responsible?