Non-payment of debts as direct damage according to the Supreme Court

1. Introduction
2. What is the origin of the Supreme Court’s ruling?
3. What did the Supreme Court say?
4. Specialization
5. Requirements
6. Respect for the fundamental principles of capital companies
7. Non-identification of the anti-legal action of the company with the anti-legal action of its directors
8. Conclusions

Introduction

Is the non-payment of debts a direct damage that entails the responsibility of the directors? What would be the consequences if this were the case? With its Judgement 721/2017 the SC developed in depth its doctrine on the relationship between non-payment of debts and direct damage. Let us see how the Supreme Court resolves this problem.

What is the origin of the Supreme Court’s pronouncement?

A company and its directors are sued by one of its creditors for the non-payment of several debts. After a first and second instance in which his claim is rejected, the plaintiff appeals in cassation. He appealed in cassation and an extraordinary appeal for breach of procedure. The Supreme Court only allowed the appeal in cassation. The only ground of appeal used by the appellant is the one we are analysing here: infringement of Article 135 of the former LSA in relation to Articles 133 and 127 of the same law. He appealed against the dismissal at first and second instance of the action for individual liability brought against the partners.

The appellant considers that the actions of the company that caused the damage were attributable to the directors. The damage consisted of the consequences of those acts which led to the non-payment of the debt. She based this argument on the fact that the directors were fully aware of the company. Furthermore, the appellant added, the directors did not act with the diligence which they were supposed to exercise in order to avoid the damage. Let us now analyse the argument of the Supreme Court.

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When does the prescription period of Directors´ liability elapse?

Liability actions against directors are in any case prescribed after 4 years. Thus, both social and individual actions, as well as liability for debts, will have the same limitation period. The difference lies in the dies a quo.

What did the Supreme Court say?

The Supreme Court dismissed the appeal in cassation on the above grounds. It does not consider that the directors acted with the intention of causing the damage. And there are several arguments it uses. Let’s go through them one by one.

Specialization

The Supreme Court has developed this point in numerous judgements. Among others, Rulings 253/2016 and 472/2016. This argument is clear: The individual liability action of the directors is a special application of civil non-contractual liability. The individual action has its own regulation, article 135 TRLSA before, article 241 TRLSC at present. This regulation differentiates it from the liability of article 1902 of the Civil Code. The individual liability of the directors is conceived as well as a liability for organic wrongdoing. In other words, the liability of directors in the commercial aspect derives from the performance of the functions of the position.

Requirements

The Supreme Court’s jurisprudence establishes six requirements for individual responsibility to be assessed:

1. Existence of behaviour, either by activity or passivity, of the directors
2. That the behaviour is attributable to the board of directors
3. That this conduct is unlawful, whether it be in violation of the law, the statutes, or the due diligence of the directors.
4. That the conduct may result in damage
5. That the damage that occurs is direct to the third party
6. That a causal relationship exists between the administrator’s conduct and the damage to the third party

Observance of the fundamental principles of capital companies

Not every breach of contract of the company or social debt can be carried out by the individual responsibility of the directors. If so, it would be going against the fundamental principles of commercial companies. Principles such as the legal personality of companies, independence in their assets would be emptied of content. Furthermore, another essential principle of civil and commercial law would be violated: contracts only generate effects for the parties.

Non-identification of anti-legal action by the company with anti-legal action by its directors

Any action by the company that contravenes the regulations cannot directly involve the liability of the directors. This would be equivalent to the objective liability of the directors. In addition, such an equation would lead to confusion between the company’s legal business and that of its directors. Non-payment of debts cannot directly involve direct damage caused by the directors.

Conclusions

The SC clearly separates the debts caused by a company from the liability of its directors. Illegal action by the company cannot directly involve the liability of the directors. Non-payment of company debts is not a direct damage in itself that entails the liability of the directors.

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Necessary requirements to exercise the individual action of responsability against the Directors.

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