Liability of administrators with regard to the Sentence of the First Chamber of the Supreme Court no. 131/2016 of 3 March

Consultation

Good morning. I am an administrator of a capital investing company that promotes real estate development. Two years ago the company began the construction of a residential building paralized due to the economic crisis.

Previously, the company received advance payments on the houses that were sold based on construction blue prints and since none of the buyers requested guarantees on the advanced payments such guaranties were not granted, among other reasons, to save on financial cost that entailed the issuance of these guarantees. Some of these buyers are now claiming the repayment of the quantities advanced but the company lacks liquidity to deal with such claims.

Since it is the company that is obliged to pay, I, as the adminstrator, cannot be held accountable, is this correct?.

General rule

The company must assume the corporate debts with all its assets, present and future.

Therefore, in principle, neither shareholders nor administrators respond personally for the debts that the company has against third parties.

But …

Administrators are liable for any damage they may have caused through acts or omissions contrary to the law or the bylaws or carry out in violation of their duties inherent in their office, provided intentionally any wrongdoing or negligence, and despite the fact that the general meeting of shareholders have adopted, authorized or ratified a damaging resolution.

To whom does the administrador respond?

Against the company, shareholders and creditors of the company.

Therefore,  can the purchasers claim against the administrator the refund of the quantities paid down as an advance payment on the purchase price of the house?

Creditors can exercise the so-called individual action for liability, provided that the acts of the administrators have directly harmed their interests.

In other words …

While the company is directly liable and will have to deal with the repayment of the quantities paid down by the buyers, they can claim against administrators when:

  1. a rule has been breached: in this particular case the clause that has been breached would be Law 57/1968 of 27 July about advance payments in the construction and sale of housing;
  2. if said incompliance is due to behaviour, either by action or by omission, of the administrators;
  3. if the behaviour of the administrators is contrary to the law and susceptible to cause a damage;
  4. the presumed damage must be directed to the third party who has contracted, as in this case, the creditor, without causing any damage to the interests of the company; and
  5. there is a  relation between conduct contrary to the law and the direct damage caused to the third parties: in this particular case the failure to ensure the repayment of the amounts has produced damages to the buyers, who, according to article 3 of the aforementioned Law 57/1968, between the extension of the contract or its resolution with the refund of the advanced payments, will not be able obtain to their satisfaction the amount deposited.

Then, is the administrator always liable for any breach by the company?

No. Because according to the Supreme Court of  Justice, the administrator may not be indiscriminately invoked for any contractual breach because this would contradict basic principles of legal personality of  companies, which under it own right must bare the sole liability of the corporate debts, or forget the principle that the debts contracted can only be effected between the parties.

Therefore, the administrators does not have any obligations in the contractual breach of the company administered by them, but only in the breach of a mandatory legal duty.

 

April  2016
© 2016 José Luis Vecilla Camazón. All rights reserved

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