Who is watching the back of the social administrators in times of Covid-19?

In the coming months and throughout the 2021 financial year, many company directors will face a difficult and delicate economic and social context and will have to take extraordinary decisions aimed at promoting the reactivation of the company’s activity, which may lead to greater social indebtedness.

Understanding the scope and timing of the exceptional measures envisaged by the Legislator in Law 3/2020, of 18 September, is essential to avoid falling into undesirable cases of financial liability.

The declaration of the State of Alarm as a consequence of the health emergency caused by COVID-19, through Royal Decree 463/2020 of 14 March, and now again with the different measures adopted in Royal Decree 926/2020 of 25 October, has led to the paralysis or drastic reduction of the activity of many companies with the consequent reduction or reduction of their income. However, the lack of specific measures that could represent a correlative temporary reduction in fixed operating costs for these same companies – with the exception of labour costs or rental income – is having a serious impact on the operating accounts of many of these companies, which have been tremendously affected by the restrictions imposed, incurring significant and extraordinary losses, which will be definitively reflected at the close of the financial year on 31 December.

Given this scenario, economic indicators suggest that over the coming months there will be a generalised situation of liquidity tension in certain sectors of activity, which have been hard hit by the health crisis, which will force businessmen and managers to adopt certain extraordinary measures and solutions, once the moratorium periods approved both for situations of solvency crisis – insolvency and pre-insolvency mechanisms – and for situations of equity crisis – mechanisms for corporate dissolution or removal of its cause – have come to an end.

Likewise, and from the point of view of the social entrepreneur, it should be remembered that the administrative bodies of companies have the specific duty to ensure the balance of assets, insofar as the net worth acts as a mechanism to cover creditors in order to guarantee compliance with the company’s obligations. If this is not the case, i.e. if the lack of diligence on the part of the company manager in fulfilling this specific duty is established, this may result in the obligation to assume undesirable liabilities.

In this regard, articles 6 and 13 of Law 3/2020, of 18 September, on procedural and organisational measures to deal with COVID-19 in the field of the Administration of Justice, temporarily, exceptionally and due to the unforeseeable effects of the health crisis, grant a certain margin of manoeuvre in the decision making of the administrators in the event of a situation of qualified losses that in a normal case would require the adoption of immediate measures. Specifically, and as an exception to the general regulation of the eventuality contained in the Capital Companies Act, two extraordinary measures are regulated in the aforementioned legal precepts: a) the suspension of the legal duty to promote dissolution due to losses until the end of the financial year 2021; and b) the suspension of the legal duty to apply for insolvency proceedings until 14 March 2021.

It should be remembered that with regard to the specific duty to promote the dissolution of the company due to qualified losses under article 363.1.e) of the Capital Companies Act, when the cause is established, the directors are obliged to call a general meeting within a period of two months to adopt either the dissolution resolution or any decision that entails the removal of the cause. If the general meeting is not held, or if it does not adopt either of the two resolutions provided for, the directors are then obliged to request the judicial dissolution of the company within two months of the date set for the meeting to be held, if it has not been held, or from the day of the meeting, if the resolution has been against dissolution or has not been adopted.

On the other hand, if the company is insolvent, and the company’s administrative body is aware of this fact, it is not possible to act in accordance with the above, since it is preferable to file for insolvency proceedings or any other equivalent mechanism for overcoming the insolvency situation.

Failure to comply with this duty, whether it is appropriate to call a general meeting to decide on the dissolution of the company, or whether it is appropriate to file for insolvency proceedings, entails an important consequence, provided for in Article 367 of the Capital Companies Act: it will entail the joint and several liability of the directors with the company, in respect of those debts arising after the occurrence of the legal grounds for dissolution or the insolvency situation.

Thus, in normal situations, it would have to be at the time when the cause for dissolution due to losses occurs in order to demand that the directors pay the company’s debts through their personal assets, a specific date that does not have to be related to the formulation of the annual accounts, but rather to the effective knowledge of the cause, whenever it occurs. However, and as we have indicated, thanks to the suspension promoted by article 13 of Law 3/2020, of 18 September, the administrators do not have to worry about compliance with such a sensitive duty, as the Legislator has opted not to penalise the administrators in such a complex economic context, informing that especially and extraordinarily, the losses of the financial year 2020 will not be taken into consideration to determine the concurrence of the cause.

In practice, this means suspending the legal cause for dissolution due to losses, but only if the legal cause for dissolution is produced or occurs as a consequence of the losses accumulated in this financial year 2020, which is the only one that does not compute due to the extraordinary circumstances. In other words, when comparing the amount of net assets with the share capital to check whether there is cause for dissolution, the losses of the financial year 2020 itself will not be taken into consideration, but those that have already accumulated in the financial year 2019 will be. Consequently, those companies that, as a result of the approval of their annual accounts for the financial year 2019, ascertain the equity imbalance caused by circumstances unrelated to and prior to the health crisis, must proceed in accordance with the provisions of article 365 of the Capital Companies Act, without the possibility of availing themselves of the extraordinary suspension.

On the other hand, if the equity imbalance is caused by losses for the financial year 2020, an extraordinary suspension period is established for the entire financial year 2021, with the intention of offsetting the losses for 2020. The administrators are thus granted a temporary safe-conduct to devote their efforts to the recovery of the company’s business. Only if the financial imbalance continues at the end of the 2021 financial year will the directors again have the duty to promote the rebalancing of assets or dissolution within the aforementioned deadlines.

The above, moreover, is not a guarantee of protection of the personal assets of the administrators, as we must remember that Article 5 of the Insolvency Act establishes the duty of the administrative body to request the declaration of insolvency, within the months following the date on which it knew or should have known of the insolvency situation. Failure to comply with this specific duty – timed in coordination with article 365 of the Capital Companies Act – implies delay in filing the mandatory application, and this may lead to the classification of the company’s insolvency proceedings as guilty, with the effects of a court ruling declaring the company guilty, not only in terms of the administrators’ assets, but also in terms of disqualification from carrying on business activity for at least two years.

With the suspension of the duty to request the company’s declaration of insolvency or equivalent mechanism, provided for in Article 6 of Law 3/2020, of 18 September, the fact is that a lifeline is given to company management bodies, given that the reform of the precept introduced by Royal Decree-Law 34/2020, of 17 November, makes it possible to delay this request in cases of current insolvency until 14 March 2021, inclusive.

In conclusion, Articles 6 and 13 of Law 3/2020, of 18 September, serve as a lifeline for company administrators in the management and organisation of business activity in extraordinary and unforeseeable circumstances such as the current one arising from Covid-19, but cannot serve as a mechanism to palliate the inefficiencies of pre-Covid times. In the current economic and social context, administrators must prioritise the efficient organisation, management and administration of the companies they run, but without forgetting their duties, responsibilities and timescales for action.

AddVANTE offers our advice, dedication and commitment to all those directors who must make fundamental decisions in the best interests of the companies they represent in the face of the crisis caused by Covid-19.