Responsibility of administrators for closure of the company
In this article we will try to answer the question of whether administrators should respond with their assets for the debts contracted by the company, when they leave the business without pay creditors and leave the company without activity.
We know that many make this decision precisely promoted by a high volume of debts.
Responsibility of administrators for closure of the company. What the law says.
The Law requires administrators to approve the dissolution of the company when the losses leave the net worth (or own funds) below half of the share capital, or even with a negative sign.
We address this issue in greater depth in our article Liability of administrators for losses where we gave guidelines to avoid the liability of administrators.
In that case we studied the risks of the administrators due to the mere fact of finding the company with a net worth of less than half of the share capital. In this article, however, we are going to analyze the possible responsibilities of administrators who lead the company to a situation of “de facto closure” to avoid paying debts.
Responding to the question, we must point out that there are recent court rulings that condemn the administrators who let the company die without paying its debts to its creditors nor proceeding to the dissolution of the company.
However, not every legal claim formulated in this sense obtains a sentence from the administrator. The courts demand several requirements to declare the responsibility of the administrator. In addition to not having proceeded to dissolve the company when it was in a legal situation to do so, it is required that if the dissolution had occurred, it would have been possible for the creditor to collect the credit. In other words, the courts impose as a requirement that the closure of the company has expressly prevented the payment of the debt.
The Judgment of the Provincial Court of Madrid of January 19, 2018 is a good example of this:
The administrator had allowed the de facto disappearance of his company without paying two invoices to a supplier, for a combined amount of approximately 20,000 euros. The creditor entity filed a lawsuit exercising the individual liability action against the administrator so that he would be responsible, charged to his personal assets, for the aforementioned amounts that he had left unpaid.
In this case, the Court considered that it had not been proven that a dissolution and liquidation of the company would have been sufficient for the creditor to have been able to collect the debt, and therefore does not condemn the administrator.
The courts are being rigorous when it comes to applying the liability of administrators for closing the company, following the doctrine established by the Supreme Court, specifically in the judgment of the Plenary of the 1st Chamber of the TS of July 13, 2016. In the opinion of the High Court, there is no doubt that the dissolution and liquidation of the company is an obligation on the part of the administrators, and that not proceeding in the indicated manner supposes a serious wrongdoing. However, this breach is not enough to determine the responsibility of the administrators with respect to the creditors, in the words of the Supreme Court it is required that the closing has in fact prevented the payment of the credit:
“for non-payment of a social debt to be imputed to the administrator, as damage caused directly to the claimant creditor, there must be a clear breach of a legal duty to which the non-payment of the social debt can be tied directly. There is no doubt that the breach of the legal duties related to the dissolution of the company and its liquidation constitutes a serious organic offense of the administrator and, where appropriate, of the liquidator. But, for the individual action to prosper in these cases, it is not enough that the company had been in the process of dissolution and had not been formally dissolved, but something else must be proven, that if the correct dissolution and liquidation had been carried out, it would have It has been possible for the creditor to collect his credit, totally or partially. In other words, more generally, that the closure in fact prevented the payment of the credit (…) this requires the social creditor to exercise the individual action against the administrator a minimum argumentative effort, without prejudice to transferring to the administrators the consequences of the burden of proof of the company’s financial situation at all times (judgment 253/2016, of April 18)”
When the creditor can prove that the closure of the company meant the impossibility of collecting his debt, he must exercise through the courts the so-called “individual liability action” to which he alluded the previously reproduced sentence.
The courts have established the general criteria or requirements of the individual liability action necessary for a judicial claim of this nature to find a positive reception. In summary, we could say that these requirements are the following:
- Existence of a breach in the duties of the administrators of a company. Said non-compliance cannot be excusable, that is, the responsibility must be attributable to the administrators themselves.
- There must have been damage suffered by a third party, who is the one who files the claim.
- There must be a direct relationship between the administrator’s breach and the damage caused, such that the administrator’s unlawful conduct was the cause of the damage.
The dissolution of the company requires a prior liquidation of the debts, which is why an administrator can find an “easy way out” of a situation of financial difficulty, abandon the activity of a company and give continuity to the business from another corporate entity.
However, the courts are condemning the administrators of the companies that adopt this measure to respond to the creditors with their own assets, as long as they bring an action before the courts individual liability vis-à-vis the administrators, and certify that had the business not been closed, the debt could have been collected.