Spanish law allows creditors to make individual liability claims against directors after de facto trading cessation

Where a company ceases to trade without following the statutory processes for dissolution, liquidation or insolvency, its creditors may find themselves deprived of recovering their debts. In such cases, the individual liability claim against directors under article 241 of the Spanish Companies Act may be an effective mechanism for recovering unpaid debts, provided certain requirements are met.

The individual liability claim

The individual liability claim is a damages action that enables shareholders and third parties (principally creditors) to bring claims against directors in respect of direct loss caused to them. It is a specific application of the general tortious liability regime under article 1902 of the Spanish Civil Code to the corporate law sphere. 
Three elements must be established to succeed. First, an unlawful act or omission on the part of the director needs to be established that was carried out with fault or negligence in the performance of their duties, whether by reason of a breach of statute, the company's articles of association, or failure to meet the requisite standard of care. Second, there needs to be a direct and quantifiable economic loss and, third, there needs to be a causal link between the director's conduct and the loss suffered.

How to establish cessation 

De facto cessation of trading refers to the disappearance of a company from commercial activity without an orderly dissolution or liquidation, whether by way of corporate or insolvency proceedings.

Courts do not accept a single indicator in isolation. They require a body of objective and consistent evidence which, taken as a whole, permits the conclusion that there was a factual, real, total and permanent cessation of activity. 
Relevant evidence may include a failure to file annual accounts with the Commercial Registry This is the most significant indicator available to a creditor, however, it is not in itself sufficient to establish de facto cessation, as the failure may have other causes not necessarily connected to the operational disappearance of the company. 

It may also include abandonment of the registered office or place of business, which may be evidenced by unsuccessful service attempts, notarial records or returned delivery receipts, closure of the company's website, absence of banking activity or assets held in the name of the company and of any registered record of activity along with no  banking operations, failure to submit tax returns (such as VAT and corporation tax), loss of the tax identification number and deregistration with the social security authorities.

Can de facto cessation of trading operate as the triggering condition for an individual liability claim against directors?

De facto cessation as an unlawful and negligent act

Case law confirm that permitting a de facto cessation of a company's trading without promoting its orderly dissolution and liquidation or without filing for insolvency – where circumstances require it, thereby frustrating any possibility of satisfying the debts owed by the company – constitutes a serious and culpable breach of the duties inherent in the office of director.

Direct loss

The loss suffered by the creditor is the non-payment of its debt, which is readily quantifiable.

In a de facto cessation, the direct loss to the creditor materialises as the impossibility of recovering the debt through the usual channels of insolvency proceedings or corporate liquidation. This is precisely because the director, by his or her act of omission, has frustrated those mechanisms by allowing the company to disappear from commercial activity.

The causation challenge

The crux of the matter lies in establishing the causal link between the corporate wrongdoing committed by the director – that is, the de facto cessation without promoting an orderly winding-up – and the direct loss suffered by the creditor.
Spain's Supreme Court requires the creditor to make a "minimum argumentative effort". It is insufficient merely to assert that the company has ceased trading and that the debt remains unpaid. The creditor must explain in a reasoned manner and even if only by way of circumstantial evidence that, had an orderly dissolution and liquidation been carried out, it would have been able to recover its debt, in whole or in part, because there existed specific realisable assets at or around the time of cessation. Unless there is a genuine prospect of recovery, a claim under article 241 of the Companies Act cannot be sustained.

A creditor with access to the last annual accounts filed prior to cessation may be able to identify asset line items, such as stock, receivables, real property, plant and machinery, that enable a reasonable argument to be made that their realisation in the context of insolvency proceedings or a corporate liquidation would have generated funds sufficient to discharge the debt. 

However, where a company has failed to file accounts – as is commonly the case in instances of de facto cessation – accounting opacity does not automatically operate to the detriment of the creditor, who does not enjoy the same level of knowledge or access to evidence as the directors. 

The greater the opacity, the lower the evidential burden placed upon the creditor and the greater the burden placed upon the director to account for what became of the company's assets. The courts have accepted that the creditor may resort to publicly available tax information such as corporation tax returns or other objective indicators of the company's financial position in support of their causal case.

From the perspective of the defence, a respondent director will seek to defeat the causal nexus by demonstrating that, even had the legally prescribed processes of dissolution and liquidation been followed, the creditor would not have recovered its debt. 

A further line of defence available to directors, where de facto cessation is followed by formal insolvency proceedings and particularly where no assets remain in the insolvency estate, is to contend that the non-payment is attributable to the company's general insolvency. The existence of other creditors and the inherent logic of insolvency may dilute the causal link, making it more difficult for the claimant creditor to articulate a precise causal narrative.

Conclusion

De facto cessation of trading does give rise to an individual liability claim against directors, where all three conditions of the action are satisfied and can be established. This requires creditors to act diligently from the earliest signs of cessation, gathering evidence of the termination of activity, identifying realisable assets and constructing a robust causal narrative.

However, case law cautions that this action cannot be deployed indiscriminately against directors in respect of every unpaid debt, as to do so would undermine the fundamental principles of company law, namely legal personality, separate patrimony and the exclusive liability of the company for its own debts.

Osborne Clarke comment

De facto cessation does not, of itself, render directors universally liable for the company's obligations and debts. However, it may constitute a material corporate wrong that gives rise to an individual liability claim where the real and persistent disappearance of the company from commercial activity without an orderly winding-up is duly established.

The success of such a claim in cases of de facto cessation depends upon the creditor constructing and proving, at least on the basis of circumstantial evidence, a specific causal link between that act of omission and the frustration of recovery, meeting the "minimum argumentative effort" required by the courts. In practice, that entails demonstrating the existence of realisable assets which, had an orderly dissolution and liquidation been carried out, would have permitted full or partial repayment.