Joint and several liability of the administrator for dissolution of the company

I. Introduction

In this article we will deal with the liability regime of directors for company debts, with emphasis on those contracted against the Social Security regarding ruling 1103/2022 handed down on 27 July 2022 by the Administrative Chamber, Third Section of the Supreme Court, which is the subject of analysis, as well as the evolution of case law on the matter.

II. Regulatory framework

The liability regime for directors is regulated in the Capital Companies Act, the revised text of which was approved by Royal Legislative Decree 1/2010, of 2 July, article 236 of which establishes that directors are liable to the company, its shareholders and creditors for damage caused by acts or omissions contrary to the law or the articles of association, or which entail a breach of the duties inherent to the position, where there must be malice or negligence. Since the entry into force of this Law, many of its precepts have been amended, as is the case of Article 236 in 2014, when the subjective extension of liability was introduced to de facto directors, senior managers and natural persons appointed by legal persons for the permanent exercise of the position of director. The legal protection granted to the company, shareholders and third parties for acts of the directors that directly harm their interests is instrumented through a range of legal actions, the scope of which has not been modified since the enactment of the Law, except for the extension of legal standing to minority shareholders to bring corporate liability actions, which was initially conceived as a subsidiary right, which since 2014 has become a right that they can exercise as long as certain requirements are met.

In addition, article 367 of the Capital Companies Act, amended in September 2022 on the occasion of the transposition into Spanish law of Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on restructuring and insolvency; establishes a system of joint and several liability of the directors for the company’s debts that operates in the event of both the existence of legal – or statutory – grounds for dissolution of the company in accordance with article 363 of the Capital Companies Act, and the failure of the directors to comply with their duties to (i) convene the general meeting to adopt, where appropriate, the resolution to dissolve the company, and (ii) convene the general meeting to adopt, where appropriate, the resolution to dissolve the company, (ii) to request judicial dissolution within two months of the date set for the meeting to be held, when the meeting has not been held, or from the day of the meeting, when the resolution has been against dissolution. The novelty of this rule lies in the time frame to which the directors must adhere, so that directors who were appointed prior to the cause of dissolution will have two months to attend to those duties; however, those who are appointed after the occurrence of the cause of dissolution will also have two months from the date of acceptance of their position to proceed accordingly.

No less important is the exemption from liability introduced by the third paragraph of Article 367, subject to the administrators notifying the competent court – within the aforementioned period of two months from the occurrence of the cause for dissolution, or the acceptance of the appointment – of the existence of negotiations with creditors to reach a restructuring plan, or the declaration of insolvency proceedings, which. As long as the effects of said communication remain, the legal duty to agree the dissolution will remain suspended, which will lapse, however, if the negotiations fail and the two-month period will resume, in which the administrators must either (i) request the declaration of insolvency if the company is currently insolvent, regardless of the existence of grounds for dissolution, or (ii) call a general meeting of the company’s directors; or (ii) convene the general meeting to resolve on the dissolution or, if it is on the agenda, the resolutions necessary for the removal of the cause, if the company is no longer in a state of current insolvency but is in a state of dissolution.

III. Comments on ruling 1103/2022 handed down on 27 July 2022 by the Supreme Court, Contentious-Administrative Division of the Spanish Supreme Court

The judgement we are referring to is particularly related to the liability regime of directors for corporate debts.

The case analyzed here began in 2017 with the decision issued by the General Treasury of the Social Security, which rejected the appeal filed by the administrator of a company against the previous decision of the Provincial Directorate of the General Treasury of the Social Security in Cadiz, in which the liability for payment of certain amounts owed to the same public body was derived. This decision was appealed by the administrator himself, who lodged an appeal in cassation with the Supreme Court in 2020, contesting the derivation of liability; however, the High Court upheld the arguments put forward in the decisions handed down by the previous courts. This is because the Social Security, as the appealed party, accredited that the company became insolvent and incurred in the legal cause for dissolution provided for in article 363.1.e) of the Capital Companies Act, in view of the financial statements for the financial years 2014 and 2015, without the appellant administrator meeting the obligations provided for in article 367 of the Capital Companies Act – then in force – within the mandatory period, but two years later, when it filed for the declaration of insolvency proceedings.

Focusing this analysis on the criterion applied by the Supreme Court in its judgments of 24, 25 and 26 June 2019 (appeals 2765/2018, 3689/2018 and 2165/2017, respectively), and 19 October 2020 (appeal 7410/2018), prior to the one analyzed and in which the court act was ratified on this occasion, the derivation of joint and several liability in directors of capital companies required the concurrence of (i) a factual situation of insolvency of the company, (ii) justification of the effective existence of a legal – or statutory – cause for dissolution of the company in accordance with article 363 of the Capital Companies Act, and (iii) verification that the directors failed to comply with the legal duties established in article 367. 1 of the Capital Companies Act.

IV. Conclusions

It could be asked whether, in the same scenario as in the judgement analyzed today, based on the parameters now determined by the aforementioned article 367.3 of the Capital Companies Act after its amendment in September 2022, the administrator of the debtor company would be liable to the Social Security if he had activated any of the insolvency mechanisms, namely (i) requesting the declaration of insolvency of the company; or (ii) notifying the court of the existence of negotiations with the creditors to reach a restructuring plan.
This is the only way to defend the exoneration from joint and several liability of the administrators who, even if they have communicated such a restructuring plan, if it is frustrated, would have to call a general meeting to agree the dissolution of the company, or request the judicial dissolution or the declaration of insolvency proceedings, as appropriate, under the aforementioned deadlines.

Although it is still too early to assess whether the recent legislative reform will trigger a comprehensive change in insolvency procedures in Spain, its introduction seems necessary, although it may be insufficient to mitigate the effects of the COVID-19 pandemic and the pressing global inflation caused by the war initiated by Russia against Ukraine. However, delving deeper into the restructuring mechanisms introduced by the third section of article 367 of the Capital Companies Act, its wording could give rise to divergent interpretations as to the calculation of the two-month period for calling a general meeting, insofar as the use of the term “resume”, instead of “restart”, suggests that the time elapsed between the occurrence of the cause for dissolution (or the acceptance of the appointment by the administrator) and the communication to the court of the negotiations with creditors would be discounted.