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A judgment issued on 8th November 2019 by the Supreme Court outlines the limitations of the joint and several responsibility of the directors of a limited liability company when the obligation for winding-up the company within the legal deadline is not fulfilled.
The case referred to the responsibility of a director of a limited liability company from which a creditor claimed the payment of a certain debt which was generated following the company becoming legally obliged to wind-up, but before the defendant had been appointed company director, substituting the previous director. The grounds for winding-up arose during the mandate of the director in office prior to the defendant director.
The judgment of the commercial courts dismissed the claim and absolved the defendant director from the payment of the debt.
The provincial court of Zaragoza repealed the judgment and sentenced the director with the reasoning that, given that the debt demonstrated by the creditor was subsequent to when the obligation for winding-up arose, the director should respond jointly and severally for the payment given that the law does not require that this director should have accepted his office before the incurrence of the debt in order to be jointly and severally responsible for the payment thereof.
The director appealed before the Supreme Court and in his defence alleged a breach of article 367 of the Spanish Capital Companies Act (LSC – Ley de Sociedades de Capital) with the following arguments:
a) That the debt incurred by the company was prior to the date upon which the defendant was appointed director.
b) That in order to apply article 367 of the Spanish Capital Companies Act (LSC) the creditor must be able to demonstrate that had the debtor company been wound-up, the partial or full payment of the debt would have been possible.
The Supreme Court rejects the second point above indicating that this alleged requirement is not applicable when the responsibility of the director is invoked via article 367, but instead it applies by the action of individual responsibility of article 241 of the Spanish Capital Companies Act (LSC). In the case of article 367, in order to demonstrate the responsibility of the director, it is sufficient not having promoted the winding-up of the company when there were grounds for doing so and that the company debt arises subsequent to the date of the grounds for winding-up coming about.
However, regarding the first point, the courts ruled in favour of the director. Firstly, let us recall that the obligations of the director when a company incurs in grounds for winding-up as set forth in article 367 of the Spanish Capital Companies Act (LSC) are: (a) to call the general partners meeting within a two months deadline so that it may adopt a winding-up agreement; (b) if it had not been possible to constitute the general meeting, to file for judicial winding-up within the deadline of two months following the date of holding the meeting; and (c) if the meeting should not adopt the decision for winding-up the company or the decision taken was against winding-up, to apply for judicial winding-up within 2 months following the date upon which the meeting was held.
The non-fulfillment of these legal obligations has the general consequence of joint and several responsibility for the directors. However, as the Supreme Court has already said in judgment 731/2013 of 2nd December the director who does not comply with said legal obligations shall respond jointly and severally for the payment of company debts originating following the apparition of the grounds for winding-up, but not for those debts arising following his or her termination of office.
The matter of the case at hand focuses on the responsibility assumed by a director appointed following the coming about of the grounds for winding-up, without the previous administrator having called for the winding-up of the company (or insolvency proceedings), with regard to debts originated after the apparition of the grounds for dissolution, but before the date of his/her appointment.
The basis of the responsibility, as set forth in article 367 of the Spanish Capital Companies Act (LSC), for the director who does not fulfill the obligation to call for winding-up or insolvency proceedings, is the “risk generated for subsequent creditors who have undertaken contracts with the company without the benefits of the patrimonial guarantee for the fulfillment of the obligation of payment”. However, the Supreme Court also points out that, a company in a winding-up situation, in the event of a change of director, the latter shall have a deadline of two months to initiate the winding-up process; and only if he does not fulfill the obligations imposed by article 367 shall he/she respond jointly and severally to company debts arising following his/her appointment, but not to those debts prior thereto, nor those arising following his/her termination.
Pursuant to this reasoning, although the company found itself with grounds for winding-up when the debt originated and the director had been appointed, given that the debt object of dispute originated prior to the appointment of the defendant director, the Supreme Court absolved the defendant of the payment of the disputed amount.
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Barcelona, 13th December 2019