Facts
Decision
A judgment of the Supreme Court of September 29, 2021 (652/2021) ruled that the failure to submit annual accounts to the Commercial Register does not determine the existence of a cause for dissolution but may allow a reversal of the charge of proof in the event of directors’ liability under Article 367 of the Law on Joint Stock Companies (LSC). The decision also clarified that the date on which the secured bond is attached must coincide with the date of payment, even if promissory notes that are to be paid later by a third party have been issued.
Facts
The following facts were stated as proven facts in the judgment:
- Between September 2013 and November 2013, a company requested that certain work be carried out.
- The company received three invoices relating to this work, the first dated November 16, 2013 and the other two dated December 31, 2013; only the first invoice has been paid. Promissory notes were issued by a third party for the other two invoices, expiring on January 12, 2014 and February 5, 2014 respectively; however, these were dishonored and not accepted when presented for collection.
- The company did not file its annual accounts with the Trade Register as of 2014, and the 2013 accounts (the last filed) revealed substantial losses which reduced the net worth to an amount less than half of the share capital. (i.e., there was a ground for dissolution under section 363 (e) of the LSC).
Decision
The Supreme Court confirmed the judgment rendered by the provincial tribunal de grande instance, by which it ordered the company and its sole director to jointly pay the sums claimed, considering that:
- the issuance of promissory notes by a third party did not change the company’s consideration as a debtor;
- in order to prove that the capital deficit was a reason for dissolution, other elements could also be taken into account, in particular the failure to submit annual accounts; and
- the losses suffered as they appear from the accounts for the 2013 financial year have proved the existence of a reason for dissolution when the director had not taken the legally prescribed actions to remedy such a situation.
First statement of grounds of appeal
With regard to the first statement of the grounds for appeal (i.e. failure to submit annual accounts), the Court clarified that the company was subject to the grounds for dissolution provided for in Article 363 (e ) of the LSC due to the existence of a significant negative share capital. However, the Court declared that the non-compliance by the administrators with the obligation to deposit accounts in the Commercial Register did not in itself determine any liability for the debts of the company and did not suggest that the company was therefore inactive, because Articles 282.1 and 283 of the LSC only provide for the closure of the registration sheet and the imposition of fines on the company for non-compliance with its obligations.
However, failure to submit annual accounts results in a reversal of the burden of proof as to the existence of negative equity or inactivity. It was therefore up to the company and the directors to prove that this was not the case. Indeed, the failure to deposit accounts in the Trade Register does not allow third parties to have knowledge of the economic and financial situation of the company.
Second statement of grounds for appeal
With regard to the second statement on the grounds for appeal (i.e. the time of the seizure of the payment obligation and whether it was before or after the cause of the dissolution for the purposes of establishing the existence of joint and several liability of the directors, as indicated in article 367 of the LSC), the Court clarified that:
- the debt of the company was not generated by the default of payment of promissory notes payable by a third party, since the obligation expressed in said promissory notes did not replace the principal obligation, but rather reinforced it by granting a new way to repay debt. Thus, the delivery of promissory notes does not constitute payment (that is, the original obligation is not discharged, but rather suspended); and
- the test necessary to determine whether an obligation was before or after the occurrence of the cause for dissolution was the seizure of the obligation rather than its enforceability. Therefore, the obligation attached at the time of delivery of the work was when payment was due in accordance with the contract (ie in November 2013) and not on the due date of the promissory notes.
Nonetheless, the Court emphasized that the obligation to effect an orderly dissolution of the company begins when directors are aware or should be aware of the imbalance of assets. In this specific case, the court understood that it should be assumed that the company was aware of the asset imbalance sometime before the company went into debt, as it could not be unknown to the director or considered surprising or suddenly. In view of the foregoing, the Court upheld the judgment under appeal.
For more information on this topic, please contact Macarena Méndez to CMS Albiñana & Suarez de Lezo by phone (+34 91 451 9300) or by e-mail ([email protected]). The CMS Albiñana & Suarez de Lezo website can be accessed at www.cms.law.