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Director and parent company liability
Under what circumstances can a director or parent company be held liable for a company’s insolvency?
Directors may be held liable in case of company bankruptcy for:
- culpable delay in filing for bankruptcy (ie, not filing within 30 days of when a company is deemed to have a general and permanent inability to pay its due debts (status of cessation of payments);
- causing a cessation of payments due to gross negligence or wilful misconduct (this is mainly liability for bad management and wrong business decisions); and
- any tortious acts or omissions that took place during their management or representation of the company (Article 71 of Civil Code).
Directors also face personal liability to social security organisations and tax authorities for certain company debts.
Directors may also be held criminally liable if they have conducted specific actions contrary to prudent management norms during the hardening or suspect period (determined by the court declaring the company’s bankruptcy and extending up to two years before said declaration) or six months before or after the declaration of bankruptcy, which includes:
- hiding, passing over or damaging company assets;
- entering into non-profitable, speculative or risky contracts, allocating excessive amounts in gaming, betting or uneconomical expenditure or agreeing to indebtedness for these purposes;
- falsely representing the debtor of other parties or acknowledging non-existing rights of other parties;
- failing to maintain the obligatory commercial books, or keeping or altering the books and thereby obstructing the discovery of the actual financial status; and
- reducing the financial status in any other way, or omitting to state or hiding contractual relationships.
Directors face personal liability:
- for favourable treatment of creditors if the company has a status of:
- cessation of payments; or
- threatened failure to:
- regularly meet due and payable monetary obligations;
- satisfy creditor claims;
- provide security; or
- knowingly favour a creditor against other creditors; and
- in case of receiving payment advances in excess of those provided in the company’s articles of association.
A majority shareholder could be considered liable for the company’s bankruptcy only in very exceptional cases (rarely approached by courts) – for example, in cases of lifting the company’s corporate veil or abuse of the corporate form in order to circumvent legal obligations.
A parent company will not be held liable for the obligations of the debtor unless specific tortious or grossly negligent acts or omissions of the parent company caused the bankruptcy of its subsidiary, in which case the directors of such company could potentially be held liable for such acts and omissions.
What defences are available to a liable director or parent company?
Depending on the legal bases used in each case, directors may prove that they have acted with prudence and in the manner appropriate for each case and, where applicable, prove that they have not acted with negligence or in bad faith or with knowledge of the possibility of the company being led into insolvency.
What due diligence should be conducted to limit liability?
According to legal theory before bankruptcy directors should act within the duty of care of a diligent businessperson with respect to risk taking, in accordance with good faith based on sufficient information.
From the time when the company is considered to be on the verge of bankruptcy, a higher threshold will apply, since it is required that the management act in the creditors’ interests. The rule of business judgement may therefore be insufficient for justifying acts of the management which pose risks leading to the decrease of corporate assets.
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