The element of causality in insolvency liability
The traditionally contentious issue regarding the nature and requirements of the action for insolvency liability does not stem from a mere desire for dogmatic correctness, but rather for legal certainty, given that it has important practical consequences. It is therefore essential to know by what criteria the judge of the insolvency proceeding may or may not order some or all of the directors of a company under insolvency proceedings to pay all or part of the insolvency shortfall and, if applicable, what criteria will be followed to apportion such payment.
The insolvency reform implemented by Royal Decree–Law 4/2014 concluded the debate regarding the nature of insolvency liability by including a final reference to the first paragraph of art. 172 bis of the Insolvency Law (LC) pursuant to which the director will only be liable for the shortfall “to the extent that the conduct which has given rise to the fault-based assessment has generated or aggravated the insolvency”. Since this reform, there is no doubt that the nature of the action is to compensate for the damage and that it has an indemnifying function.
In its judgment of the plenary session of January 12, 2015, the Supreme Court clarified the scope and application of this major insolvency reform. However, today there is still insufficient clarity, in my opinion, regarding one of the requirements of insolvency liability: the element of causality that the current wording of the article requires for there to be a finding of insolvency liability.
Since the insolvency reform implemented by Law 38/2011, article 172 bis LC requires the judge of the insolvency proceeding to resort to imputability criteria that were not envisaged in the prior wording, although in accordance with that wording the judge was granted power to make a finding of liability based on each party’s involvement in the facts giving rise to the assessment that fault was present in the insolvency. However, with the reform implemented by Royal Decree-Law 4/2014 referred to above, the current wording of article 172 bis LC no longer refers to causality with the conduct that has given rise to the assessment that fault was present in the insolvency, but rather to the fact of having generated or aggravated the insolvency, a scope of liability which is much more specific and limited than the former. This has as a consequence that, in practice, insolvency proceedings involving liquidation assessed as fault-based, do not entail liability to cover the insolvency shortfall under article 172 bis LC, if it is not possible to establish, and prove, the relationship of causality between the willful or grossly negligent conduct of the director whose actions gave rise to the assessment that fault was present in the insolvency and the generation or aggravation of the insolvency. This occurs, for example, in many of the cases of the irrebuttable presumption of fault set out in article 164.2 LC which are precisely the most serious cases of willful misconduct by directors (i.e. material accounting irregularities, dealings in assets with a view to defrauding creditors, cases of imputable breach of the arrangement with creditors, etc.), in which the director’s conduct falls significantly short of the degree of care that is required of him and may have caused enormous damage to the company, even if such conduct cannot be directly connected with the insolvency of the company. In these cases, the creditors, as a party to the assessment, may ask the court to make a finding of fault, and the court may agree to this. The court may even make a finding of disqualification of the director from managing the assets of another, the loss of his/her rights, an order to return assets, and even an order to indemnify for the damage and loss caused pursuant to art. 172.1.3 LC; but the director will not be ordered to cover the insolvency shortfall if the last of the requirements introduced by the legislature in article 172 bis LC is not met, namely, the requirement that the conduct have an impact on the generation or aggravation of the insolvency, which, in my view, leaves the door open to legal uncertainty since there are no clear criteria on how this requirement should be interpreted, nor many court rulings on this subject.
Most recent judgments
Notable among the most recent rulings are the Supreme Court judgments of January 12, 2015 (for delay in the petition for the insolvency order) and of December 1, 2016 (for material accounting irregularities), in which there was a finding of insolvency liability. However, in other cases, such as the ones decided by the same Court in its judgments of June 9, 2016 (also for accounting irregularities as well as the breach of the duty to cooperate with the judge); of April 22, 2016 (for delay in the petition and fraudulent disposal of assets); or of November 3, 2016 (for failure to produce documents with the petition), there was no finding of insolvency liability.
The legal certainty that should exist in the matter requires us to establish those clear criteria which determine in each case if the director’s conduct that gave rise to assessment of fault in the insolvency has an impact on the insolvency and to what extent, given that the director should be liable for the insolvency shortfall in that proportion.
Departamento de Litigación y Arbitraje de Garrigues