Introduction
One of the most common problems when claiming sums of money or taking any form of legal action against commercial companies (such as limited liability companies or public limited companies) is finding, once a judgment has been handed down, that the defendant company lacks the assets to satisfy the judgment. The option of initiating compulsory insolvency proceedings against the defendant company entails not only considerable legal costs and a lengthy timeframe, but also the likelihood of recovery being difficult to achieve.
The most plausible alternative to increase the chances of recovery in such cases lies in the possibility of shifting liability to the directors of the defendant company on the grounds that the company has incurred a cause for dissolution, and in particular, dissolution due to losses.
From the Commercial Law Department of Belzuz Abogados, S.L.P., as experts in corporate litigation, we recognise the need to enhance the viability of the actions brought by our clients to better protect their rights.
In this article, we will analyse the requirements for proceeding with this transfer of liability, the current state of case law, and the strategic advantages offered by this approach.
Legal framework
Article 363.1 of Royal Legislative Decree 1/2010 of 2 July, approving the consolidated text of the Companies Act (LSC), sets out a list of grounds on which a limited company must be dissolved: cessation of the activity constituting the corporate purpose, paralysis of the corporate bodies, etc. In judicial practice, it is relatively common to encounter companies that fall under the ground for dissolution provided for in Article 363.1.e LSC:
“Due to losses that reduce the net assets to an amount less than half of the share capital, unless the latter is increased or reduced to a sufficient extent, and provided that it is not appropriate to apply for a declaration of insolvency.”
It should be noted that the occurrence of this ground for dissolution may or may not coincide with insolvency, which is an objective prerequisite for a declaration of insolvency proceedings, but that insolvency and this loss of equity need not necessarily coincide. However, it is common for commercial companies with this imbalance in equity to be in a state of insolvency or on the verge of it. Of course, this ground for dissolution is particularly evident in cases where the net assets are negative, a situation that is somewhat less rare than one might wish in procedural practice.
Furthermore, verifying a commercial company’s net worth is a straightforward task, as it is sufficient to consult the annual accounts filed with the commercial register in which the company is registered. Failure to file accounts will also have consequences regarding the attribution of liability, as we shall see later.
Article 365 of the Companies Act imposes on company directors the obligation to convene a general meeting within two months of the grounds for dissolution arising, so that the meeting may adopt the resolution to dissolve the company or, where appropriate, the resolutions necessary to remove the grounds for dissolution, such as the formalisation of financing agreements, capital increases or accordion transactions. This obligation to convene the meeting shall not apply if the board of directors has applied, in due time and form, for a declaration of insolvency or pre-insolvency proceedings.
The key to the liability of the board of directors lies in the failure to comply with this obligation to convene the meeting. Article 367 of the Companies Act stipulates that directors who fail to comply with this obligation (for which, it should be noted, the time limit is a mere two months) shall be jointly and severally liable for all the company’s debts from the occurrence of the cause of dissolution or, if they were appointed after such occurrence, from the date of their appointment.
This liability is ex lege, that is to say, imposed by law, and is objective in nature: once the duty to convene the meeting to dissolve a company subject to grounds for dissolution has been breached. No subjective or personal circumstance of the director allows this liability to be excluded or limited, as no assessment of fault or wilful misconduct is required; it is therefore very difficult for the defaulting director to put forward arguments or defences to exonerate themselves.
The liable director may resign from their post, but this will only exclude liability for debts incurred after such resignation: liability for debts accrued during their tenure will remain enforceable despite the resignation.
Possibility of bringing simultaneous actions against the company and the director
The joint and several liability of the director in these cases is comparable to that of a joint and several guarantor in relation to the principal debtor (see, inter alia, Supreme Court Judgment 420/2019 of July, Appeal No. 3654/2016). It is therefore not necessary to bring proceedings first against the debtor company and, once enforcement against the company proves unsuccessful, against the director. Case law has for years allowed for the possibility of adjudicating the liability of both the company and the director for debts.
Traditionally, the issue of different jurisdictional competence to hear the two actions was raised by the defendants: whilst it is common for claims for payment against companies to be heard by the courts of first instance (now the civil divisions of the courts of first instance), jurisdiction to hear the action under Article 367 of the Companies Act was assigned to the commercial courts (now commercial divisions) (current Article 87 of the Organic Law on the Judiciary).
Case law resolved this issue by allowing both matters to be settled in a single set of proceedings before the commercial courts; special jurisdiction over the action under Article 367 of the LSC is vested in these courts, and the claim against the company was raised in the same application as a necessary preliminary issue for holding the director liable. In this regard, reference must be made to Supreme Court Judgment 539/2012 of 10 September, rec. 2149/2019, handed down by the Plenary Session of the First Chamber, which makes it clear that it is possible to address the director’s liability and the claim against the company in a single set of proceedings before the commercial court, with the consequent saving of time and legal costs.
It is nevertheless possible to bring the actions separately: first against the company and subsequently against the director. As both are jointly and severally liable, the claim against the company also interrupts the limitation period for the action against the director, pursuant to Article 1974 of the Civil Code (Supreme Court Judgment 1512/2023 of 31 October, Case No. 4588/2020).
It should be noted that the time limit for bringing an action for liability for debts under Article 367 is the same as that for claiming the principal debt from the company. This is not an action with an independent time limit, nor is it comparable to that of corporate liability actions against directors.
In any event, given the increasingly lengthy processing times for proceedings, it is advisable, as far as possible, to combine both actions into a single proceeding.
Reversal of the burden of proof regarding the legal cause of dissolution due to losses in the event of failure to file accounts
The main obstacle to holding a director liable for financial losses has traditionally been the inability to prove the company’s net worth due to the failure to file annual accounts. This lack of transparency regarding the company’s financial position stems from the failure to comply with the obligation incumbent on all limited companies to file their accounts.
In response to this problem, case law has developed a doctrine whereby, in the absence of the filing of annual accounts, the defendant director against whom liability is sought bears the burden of proving that the company was not subject to grounds for dissolution due to losses at the close of the financial year (Supreme Court Judgment 202/2020, of 28 May, rec. 3365/2017). For its part, Supreme Court Judgment 94/2024 of 25 January, rec. 6049/2019, even refers to a presumption of grounds for dissolution due to losses if the company has not filed its annual accounts and other peripheral indications are present, such as widespread non-payment or de facto closure.
This does not mean that the failure to file annual accounts automatically amounts to a finding of the cause for dissolution due to losses; therefore, it remains advisable to seek expert advice on the matter in order to devise the most effective procedural strategy.
Strategic application and advantages
The combined application of these provisions and doctrines allows claims for payment against companies with potential solvency issues to be pursued with greater certainty, provided the necessary requirements are met.
The advantages of a well-designed legal strategy include the following:
– The possibility of bringing legal action against additional parties (directors) whose solvency may be greater than that of the principal debtor (limited company).
– Time savings by conducting a single legal proceeding against the company and its directors.
– Assessing in advance the prospects of recovery following the bringing of proceedings by investigating the assets of directors with joint and several liability.
– Difficulty for directors to mount a defence if grounds for dissolution due to losses existed at the time the company’s debt arose.
– Reversal of the burden of proof if the debtor company has not filed its annual accounts.
For all these reasons, it is important to approach each case with a thorough analysis of all relevant facts and the design of the best strategy. Having lawyers specialising in commercial and procedural law is essential and can make the difference between failure and success in defending the client’s recovery rights. At Belzuz Abogados, S.L.P., we have a team of experts in the field to tackle each case with the dedication it deserves.