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The liability of managing directors in times of Covid-19.

The fast evolution of the situation caused by the COVID-19 pandemic and the obvious unknown a new virus and its subsequent disease generates, will cause terrible socioeconomic consequences in Europe and the entire world.

When referring to our local economic network which is, for the most part, direct or indirectly linked to tourism, these consequences will be specially painful and long for businesses related to the catering and hotel industry as we are confronted not only to a temporary lack of funds problem, but specially to a structural one as the result of bankruptcy or production chain stoppage due to the fact that many small and medium businesses are not capable of generating enough incomes to not just afford an acceptable viability of the business, but also to be able to support the structural fixed costs it involves (staff, supplies, taxes, financial costs, rent, etc.).

If we add the difficulties many small and medium businesses are having to have access to the approved lines of credit and the excessive leverage, we will see how the
Patrimonial economic situation of many businesses will soon show an imbalance including all the problems this may mean for the managing directors personally.

Referring to this, we should take into account the provisions of articles 363 and following of Royal Decree Law 1/2010, July 2nd, in which the revised text of the Spanish Corporates Act (hereafter, LSC) is approved and obliges (article 363) the company to dissolve “due to losses that reduce the equity to an amount smaller than half of the share capital unless this amount is increased or reduced enough and whenever the request of declaration of bankruptcy is not applicable”. Likewise, article 365 LSC provides the obligations of the managing directors of the company to take the needed actions in order to eliminate the cause of dissolution (in case the company is in this situation). These actions should be taken after the agreement to increase the share capital, additional new shareholders to compensate the losses or, in case the previous would not be possible, by means of a general assembly within two months to agree the agreement of dissolution or, if the company is insolvent, the request of declaration of bankruptcy.

In case the managing directors do not act according to the previous provisions, they would also be held personally liable as provided in article 367 LSC as “managing directors who renege on the obligation of calling a general assembly to agree, when needed, the agreement of dissolution will jointly and severally respond to the social obligations after the occurrence of legal cause of dissolution as well as those managing directors who do not request the legal dissolution or, when appropriate, the declaration of bankruptcy of the company within two months from the date foreseen for the general assembly to be held, in case it has not been, or from the day of the assembly when the dissolution has not been agreed. In these cases, the required social obligations will presumed to be after the date of the occurrence of legal cause of dissolution of the company, unless the managers can prove the obligations belong to a previous date”.

Consequently to the previous, and in order to minimize or eliminate eventual personal liabilities that may arise for many managing directors, it is important to act from different points of view, not just financial but also legal. The actions to be taken depend on the viability analysis that, foreseeing different scenarios, all businesses should introduce according to the individual situation and perspectives in order to cope with the nearby future.

Referring to this, and without prejudice of de provisions stipulated by RDL 8/2020, March 17th, about urgent and extraordinary measures to be taken in order to fight against the social and economic impact of COVID-19, and with the aim of minimizing personal implications that in the nearby future managing director might be required to, from a legal point of view, contracts implying short and medium term economic obligations by means of leverage or payment grace should be renegotiated whenever this is possible and put these negotiations in writing in order to be able to take advantage of the benefits that arise from the arrangement with creditors if no other legal option to continue with the activity would exist.

True is that RDL 8/2020, March 17th, article 40.12 excludes managing directors from their liability in terms of debts incurred during the lockdown period stating that “if the legal or statuary cause of dissolution has been decided during the lockdown period, managing directors are not liable for the company debts during this period”. However, the current regulation does not reply or include to the matters of exclusion of liability when talking about company debts incurred after the lockdown period although these would be the result of it.

Taking into account all the previous and with the aim of protecting the personal liability of managing directors whose companies find themselves suffering a situation of equity imbalance and which cannot be covered or eliminated by new financing or negotiation with creditors to achieve an agreement of refinancing or an extrajudicial agreement of payment, should necessarily choose the shareholders’ board to adopt the agreement of dissolution and wind-up the company or request an arrangement with creditors with all the formalities this involves and, especially at this moment, put in writing all negotiations agreed with creditors during the pre-bankruptcy phase in order to be able to submit these documents when requiring an anticipated proposal of compact or even a demand of exemption of the debt in case the managing directors as natural persons would find themselves in the need of requesting an agreement with creditors to personally guarantee a large part of the company debts.

To conclude, any situation must be analysed individually undergoing a suitable viability analysis that, having foreseen different scenarios, allows us to take the needed measures as soon as possible from a legal point of view according to the current regulations.

At the same time, public authorities should take new legal steps that, taking into account the exceptional situation we are living, minimize or adapt the economic implications and liabilities the current regulation leads many managing directors to.

Luis del Hoyo Pérez de Rada
Lawyer at dh Abogados

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