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May I Incur Liability If I Do Not File for Bankruptcy After COVID-19?

Present and future health and economic crisis due to COVID-19 in our country is nothing new. Uncertainty knocks on the door of all Spanish homes, while the legislative “epilepsy” of the government does not help alleviate this general anxiety among workers and employers alike.

Although we are aware of the current dramatic situation in the Spanish labor market through the countless temporary labor force adjustment plans initiated (ERTEs), this article is intended for employers who have been forced to close their businesses and have lost their source of income; to those employers that do not know if they will be able to reactivate their businesses when the state of alarm ends, or if, on the contrary, they  will be forced to restructure their companies and their debts due to their inability to obtain liquidity.

Our legal system has created a market protection framework consisting of a series of mandatory rules for all different agents that operate in the market (companies, creditors, suppliers, public entities, workers, consumers, etc.).

Given that corporations and individual entrepreneurs have a leading role in the market, most of these mandatory rules are aimed at regulating their practices under penalty of incurring liabilities in case of non-compliance. Said rules refer to, among others, the company's legal obligation to keep the accounting by faithfully representing the condition of the business; the obligation to submit every year annual financial statements to the Companies Registry in order to allow creditors to know the net worth and financial situation of the company; the obligation to file and pay taxes; the obligation to wind-up and liquidate the company when the net worth is lower than the share capital; the obligation to file for bankruptcy when the company is insolvent, and a long etcetera.

The consequence of not complying with these rules entails that the officers or directors of the company may be held liable for certain responsibilities of the company either for commercial, insolvency, tax or criminal issues. Depending on the act or omission committed, they might be held personally liable for different debts of the company or sanctions imposed on it.

Therefore, corporate directors, in their day-to-day management of the company or when they have to deal with a business crisis, they always have the Sword of Damocles hanging over their heads in every step they take before the multiple responsibilities they must face depending on the decisions made or on the actions carried out.

Given the complexity and multitude areas that should be covered in an exhaustive analysis of all possible responsibilities of a corporate director in general terms, in this article we will specifically talk about bankruptcy liability.

Therefore, from a bankruptcy perspective, and considering the unprecedented health crisis we are going through, the first thing that a corporate director must  analyze when the state of alarm ends is whether the company is in a current or imminent insolvency situation which occurs when the company "cannot regularly fulfill its enforceable obligations or foresees that it will not be able to fulfill them" (Art. 2 of Bankruptcy Act 22/2003).

We already explained in a previous article Should I File For Bankruptcy After COVID-19? the different steps to be  taken  by entrepreneurs when the state of alarm ends in order to carry out a static and dynamic analysis of their company to know whether it is insolvent or no.

However, if once the analysis has been carried out, and despite all the measures adopted, the business crisis situation persists or the macroeconomic and microeconomic evolution does not favor the company's business, the entrepreneur  or corporate director must act cautiously in order not to be held personally liable for all or part of the company’s debt because of the business management.

This is precisely one of the factors to consider when making the decision whether to file for bankruptcy or not.

Therefore, if after having analyzed the cash flows and the ability of the company to pay its creditors, it cannot meet or it is expected that it will not be able to generally meet its payment obligations on due date, we can conclude that the company is in a current or imminent insolvency situation.

In such a situation, the director has a legal obligation (art. 5 of Bankruptcy Act 22/2003) to file for bankruptcy.

If bankruptcy is not filed for or if it is filed for too late, the corporate director may be held personally liable for the corporate debts.

I this sense, in a specific phase of the bankruptcy proceedings, the Judge and the Bankruptcy Trustee will carry out an analysis aimed at determining whether bankruptcy proceedings were filed for timely or not. In this phase, and in order to see if the directors have actually incurred bankruptcy liability, they will also analyze all the actions carried out by the company's management body in the two years before the bankruptcy proceedings were initiated.

However, it must be noted that the bankruptcy liability of the corporate director of a company in crisis is not limited to the late filing of the bankruptcy proceedings, although in this article we will only focus on this cause.

And what is the deadline for filing for bankruptcy? First, it must be noted that the duty to voluntarily file for bankruptcy is suspended (art. 43.1 Decree Law 8/2020).

However, this does not mean that we cannot voluntarily file for bankruptcy since the right to file it is not suspended. Furthermore, if we consider that failure to file may cause harm to third parties such as the workers of the company, we can file for it and state the aforementioned damage so that the Court can process it.

However, as we said, the duty to file for bankruptcy has been suspended which means that if the situation of insolvency has occurred during the state of alarm we can wait for the state of alarm to end and from that date on, we will have two months to file for bankruptcy if we are insolvent and thus avoid personal liability. The same applies in the event that insolvency occurred prior to the state of alarm.

Besides, the suspension of the duty to file for bankruptcy has an important impact on necessary bankruptcy proceedings (that is, those filed for or to be filed for by our creditors) which will not be admitted during the state of alarm.

Moreover, we cannot forget that procedural deadlines are suspended in all jurisdictions. This means that if we had to meet a certain deadline, it will resume when the state of alarm ends.

However, the judge may agree to legal actions that are necessary to avoid irreparable damage to the rights and legitimate interests of the parties (Additional Provisions 2nd and 4th of Royal Decree 463/2020).

In this sense, the Permanent Commission of the General Council of the Judiciary (CGPJ) decided last March 18, 2020, that during the state of alarm, all communications can only be made through LexNet and exclusively for urgent and unavoidable legal actions, thus excluding all face-to-face communications.

All the above aspects will have great importance in the phase of the bankruptcy proceedings where it must be determined the liability of the corporate director who may be held personally liable for the debts of the company. Besides, the judge may decide to disqualify the director from managing third-party assets for two to fifteen years.

Therefore, it is vitally important to get advice from a professional specialized in companies in crisis, insolvency, and bankruptcy law since each case requires a detailed and specific study. Each company, each proceeding, is a tailor-made suit.

 


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Pablo García's picture

"Exercising this profession requires a mixture of passion, vocation, legal knowledge, public speaking and empathy with the client "

I am a lawyer with double degrees in Law and Business Administration and Management. The legal and economic knowledge has allowed me to specialize mainly in areas of law more oriented to the world of the company, such as Bankruptcy Law, Commercial Law, Civil Law, Civil Procedure, Administrative Law and Economic Criminal Law.

I am a dedicated lawyer, empathetic and passionate, who tries to defend the interest of his client above all.