In a judgment dated 11th April 2018, the Supreme Court has confirmed the principle of joint and several responsibility of the directors of a company for the debts incurred by the latter, under determined circumstances, in spite of the creditor being aware of the situation of the risk of insolvency when the debt was incurred.
The case affected a company which was in a legal situation of dissolution, although it operated in the market with apparent normality. In spite of this, the two directors of the company did nothing to dissolve the company or restore the equity balance, as indicated by the law. Furthermore, for years, the directors had omitted to perform the obligation to file company accounts in the commercial registry, perhaps in order to conceal the fact that the company capital was negative.
During two years, the creditor supplied materials to the debtor, which were not paid in full. It is worth noting that in the course of the business relationship, the debtor communicated to the creditor its will to present an anticipated proposal of agreement, which was not accepted by the creditor.
Finally, the creditor filed a payment claim against the debtor company and both of its directors. The factual basis for claiming the joint and several responsibility of the directors was the failure in their obligation to summon a meeting within the term of 2 months as from the moment of becoming aware of being in a situation with cause for legal dissolution. The legal grounds for this was article 105.5 of the Limited Liability Companies Act (today article 367 of the Spanish Capital Companies Act), which establishes the joint and several responsibility of directors for debts incurred by the company once the cause for legal dissolution has arisen, if the shareholders meeting is not called in the term of 2 months so that, where appropriate, the dissolution agreement may be approved.
The judgment of the court of first instance upheld the creditor’s claim and sentenced the debtor company and both of its directors to jointly respond to the payment of the debt. The court founded its judgment in the aforementioned article 105.5 of the Limited Liability Companies Act. The judgment was the object of appeal by one of the directors.
The Provincial Court of Zaragoza upheld the appeal and absolved the directors of their responsibility for joint payment. The grounds for such a conclusion lies in the fact that the creditor was aware of the financial situation of the debtor and was thus assuming the risk of non-payment without counting on the hypothetical collateral of the directors. Likewise, it was argued that the director of the creditor and one of the directors of the debtor were cousins and friends. In order to maintain criteria, the court called upon two judgments of the Supreme Court dated 23rd November 2011 and 14th April 2013.
The judgment of the Court was appealed in cassation before the Supreme Court, which indicated that, from a factual point of view:
1) It was proven that the debt had been incurred subsequent to the cause for legal dissolution.
2) It was proven that, in spite of being aware of said circumstance, the directors did not pursue the dissolution of the company.
3) It was proven that the creditor was aware of the precarious situation of the debtor company.
Although all of the above is correct, and especially the element of “knowledge of the financial situation of the debtor”, the Supreme Court rejects the thesis of the Court regarding the exoneration of the responsibility of the directors when the creditor may have been aware of the risk it was being exposed to when undertaking commercial transactions with the debtor. It was argued that the mere fact of being aware of the insolvency situation of the debtor is not in itself sufficient for exonerating the directors from their responsibility.
The Supreme Court concluded by clarifying the meaning of the applicable case law to this set of facts, with reference to the judgment of 4th December 2013, in which the possibility of absolving the directors when a creditor brings a bad faith claim is left open, when, furthermore, a situation of insolvency or a poor financial situation exists for the debtor. All of the above premises are a necessary condition in order for the exoneration of the directors to occur, but they are not enough:
another type of circumstances must exist, that is to say, that the creditor is in a position to know and control the debtor company, which demonstrates that the creditor assumes the risk of insolvency (for example in cases whereby the creditor is a dominating or relevant partner of the debtor company).
Thus, the Supreme Court sets a casuistic interpretation, whereby the exception to the principle of responsibility of the directors must be analysed in light of the specific facts surrounding the case in question, in this way fleeing from a quasi-automated application, of the exception which would distort the general rule, and would prejudice legal security, which must prevail in commercial traffic at all times.
Eduardo Vilá
Vilá Abogados
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27th April 2018
