Supreme Court ruling of April 11, 2018.
One of the issues that raises doubts about the enforceability of company directors' liability for company debts for failing to dissolve and liquidate the company when it was experiencing financial instability (Article 367 of the Spanish Companies Act) is whether the creditor seeking to hold the directors liable was fully aware of the debtor's financial instability. In other words, whether the commercial transaction that led to the non-payment claimed from the directors was entered into by the creditor knowing that the debtor was in a state of financial instability or insolvency.
Regarding a case such as the one mentioned, the Supreme Court recently ruled in a judgment issued on April 11, 2018.In the case judged, the creditor who initiated the claim against the directors of the debtor company (which was in a legal state of dissolution, and despite this, its directors did not fulfill their duty to dissolve and liquidate the company or replenish its equity) was fully aware of the serious economic difficulties of the company, and the plaintiff's director was related to the defendant directors.
Initially, the claim was upheld and the debtor's directors were found liable. However, after the appeal was heard, the Provincial Court of Zaragoza upheld the appeal and overturned the previous ruling. This court based its decision to exonerate the debtor's directors not on the grounds that their actions had not been contrary to the requirements of Article 363 et seq. of the Spanish Companies Act (LSC), but rather on the grounds that the creditor's actions constituted an abusive exercise of their rights and therefore contrary to good faith. At the time the contract was entered into and the debt arose, the creditor was aware of the risk involved in collecting the debt, given that they knew the debtor had negative equity, was experiencing significant difficulties in fulfilling its obligations, and because one of the defendant's directors was a friend and cousin of one of the plaintiff's directors.
Once the issue was raised in cassation before the Supreme Court, it overturned the judgment of the Provincial Court of Zaragoza and confirmed the one issued at first instance.
The Supreme Court's decision rests on the principle that "the mere knowledge of the company's economic crisis or insolvency by the creditor at the time the debt arises does not deprive them of standing to bring a liability action. On the contrary, by entering into the contract under these circumstances, they are aware of the legal guarantee that the aforementioned provision makes the administrator jointly and severally liable for payment of their debt for failing to initiate dissolution proceedings, if there were legal grounds for doing so." Furthermore, invoking the Supreme Court's own established case law on this matter, the Court adds that knowledge of insolvency or imbalance, in itself, is not sufficient to consider the claim (the declaration of the directors' liability) contrary to good faith; rather, for this exception to apply, other additional circumstances must be present in the case. Thus, it literally states: “These circumstances are linked to the fact that the creditor plaintiff, in granting credit to the company, enjoyed not only a position of knowledge, but above all, of control over the debtor company, which highlighted the risk he assumed of its insolvency. This occurs, for example, when the creditor is a dominant or relevant shareholder of the debtor company. Mere knowledge of the debtor's insolvency, which is what happens in this case, according to the proven facts, is not sufficient.”
Therefore, in the judgment discussed, the Supreme Court reiterates its previous jurisprudence to the effect that knowledge of the debtor's serious economic crisis situation is not a sufficient element to except the claim for conviction of the debtor's company directors, and that for this claim to be considered contrary to good faith, other additional conditions must exist, such as a corporate link between the plaintiff and the defendant or between the directors of the plaintiff and the defendant.
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Andreu Pujol
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A graduate in Law from the University of Barcelona and with a Master's degree in Business Law from the same university, he worked at the law firm Alonso-Cuevillas Advocats and later joined the Civil and Commercial Litigation department of the law firm Bufete Bueno Bartrina. He then joined the team at the firm Casamitjana-Cuyas-Morales, and subsequently continued his career at Bufete Herrera Advocats, in the Commercial and Litigation department. In November 2015, he joined aÀmbitJurídic i Econòmic, SLP, as a professional partner, to head the Commercial and Insolvency practice.
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