Is there any scope for other parties (e.g. director, partner, parent entity, lender) to incur liability for the debts of an insolvent debtor?
Restructuring & Insolvency
When any such categorisation is carried out as a result of the commencement of the liquidation phase, the court may also order the directors or liquidators, whether de iure or de facto, the attorneys with general powers (including those who held such offices in the two years preceding the date of declaration of insolvency) and the shareholders that have refused, with no reasonable cause, to the capitalisation of credits or the issuance of convertible instruments established in a refinancing agreement, to cover all or a part of the deficit of the insolvency proceeding.
The concept of de facto director is based, according to the most recent case law, on three fundamental pillars, namely:
- Habitual or continuous discharge of that duty (excluding one-off intervention), an effective and real presence in the corporate management area being necessary;
- Autonomy, which involves the independent exercise of management powers, without following instructions or being subject to the approval or direction of another person; and
- A certain quality in the discharge of such duties, those whose action remains in the area prior to the decision being excluded. In other words, the action must be of importance.
As referred, it should be highlighted that shareholders can be affected by the categorisation of an insolvency procedure as guilty. Act 17/2014 (previously Royal Decree-law 4/2014) added a new section 4 to article 165 of the Spanish Insolvency Act establishing a further iuris tantum assumption of culpability for any director or shareholder who denies any capitalization of credits or the issuance of convertible securities without any reason, blocking the achievement of a refinancing agreement.
The aim of this new event of liability could be encouraging the directors and even the shareholders of any company to avoid a petition for insolvency proceedings while there is still a reasonable possibility of paying off the creditors.
Under Japanese law, parties other than the debtor are not liable for the debts of an insolvent debtor except under limited circumstances where, for example, they have expressly guaranteed such debts.
The executive board and shareholders may incur liability if decisions made results in losses for the company or a third party. The executive must have acted intentionally or negligently in order to incur liability for the loss that the decisions have caused the company or a third party.
The assessment of liability is more severe in case of shareholders as the share-holder must have acted with gross negligence in order for him to incur liability for the loss that the company, other shareholders or a third party has suffered. This is consequently an exception to the rule that as a starting point the share-holder cannot incur liability.
As described previously, directors can be liable for the debts incurred by a company that is cash flow insolvent or where the director has reasonable grounds for suspecting that it is likely to become cash flow insolvent.
The Corporations Act also provides that holding companies can liable for the debts of the insolvent subsidiaries in circumstances where the parent failed to prevent the insolvent trading of the subsidiary, so long as the parent had reasonable grounds to suspect that the subsidiary was insolvent.
If a director or third party has provided a guarantee to a creditor in respect of a company's debts, that guarantee may be capable of enforcement against such director or third party guarantor personally.
Directors may also be personally liable for the company's debts if they breach their fiduciary duties in certain circumstances. In addition, if it appears that any person has been carrying on the business of the company to defraud creditors or for any fraudulent purpose, a liquidator may apply to the Court for an order that such persons make a contribution to the company's assets.
As a separate legal entity, a parent company will not usually be liable for its subsidiary's debts. However, in certain circumstances, the Court may lift the corporate veil to make a parent company liable if it can be demonstrated that:
- Some impropriety has occurred and the incorporation of the subsidiary company is a façade designed to conceal or avoid liability on the part of the parent company; or
- The parent company is exercising control over the subsidiary, such that the subsidiary is effectively acting as its agent.
Executive bodies of a Swiss corporate may become liable for certain social security contributions and withholding tax obligations which were not paid prior to the initiation of insolvency proceedings. Furthermore, the parent company of an insolvent corporate debtor may become liable for claims of creditors of the latter in exceptional circumstances, namely under the theories of piercing the corporate veil and/or based on a trust based liability. Requirements established in court precedents and legal doctrine are fairly strict, though.
Partners and lenders are not typically exposed to the risk of incurring a liability for the debts of an insolvent debtor unless they have assumed the role of a de facto shadow executive of a Swiss corporate in which case they may become exposed to the risk of director's liability (see section 11 above). That said, recent court precedents hold that it is generally not sufficient to be qualified as a shadow director where a contracting party or lender merely acts to protect its contractual position.
While they do not directly incur a liability for the debts of an insolvent debtor, the company's statutory auditors may become liable for damages similar to a company's director if they do not notify the court if the company is over-indebted and the board of directors fails to notify the court itself (see section 11 above).
- contractual assumption of liability or
- profit and loss transfer and/or domination agreement,
other parties are, in principle, not liable for the debts of a company with limited liability.
The shareholders may become liable for the debts of a limited liability company if they commingle the assets of their company with their own (‘piercing the corporate veil’).
The German Federal Court has developed a liability of the shareholders towards their company for ‘exterminating interventions’ (existenzvernichtender Eingriff), ie acts of the shareholders depriving the company of the assets it needs for remaining a going concern, so that sooner or later it will become insolvent.
Except for guarantors, joint obligors, co-borrowers, or similar parties, third parties are not liable for the Recognized Claims of an insolvent entity. Partners’ and shareholders’ are generally limited to the value of their equity contributions.
British Virgin Islands
Other than claims against directors and other officers in respect of misfeasance, fraudulent trading, or insolvent trading, or other general grounds on which personal liability may be incurred, such as assisting in a breach of fiduciary duty or fraud, there are no routes by which other parties connected to the liquidation of a company may be liable for the debts of an insolvent debtor. In relation to misfeasance, fraudulent trading, and insolvent trading, it should be noted that the liability is to the company to make good losses that have been suffered, and not to provide any third party with an additional person against whom they may seek a remedy.
At present, there is no regime applicable to insolvent partnerships, though the bankruptcy of a partner will trigger the dissolution of the partnership, in the absence of agreement to the contrary. The court has jurisdiction to order the dissolution of a partnership where its business can only be carried on at a loss, but only the partners can apply for such an order, and creditors have no recourse. There is no specific regime relating to voidable transactions (though section 81 of the Conveyancing Act remains available). If the partnership is a limited partnership, only the general partner may be sued personally, and commonly limited liability companies are used as sole general partners, effectively removing the risk of personal liability for partnership debts.
Only if there is a specific contractual provision will parent or group companies become liable for the debts of a related company, unless it is possible to pierce the corporate veil and identify the parent with the subsidiary.
Each partner is jointly liable with the other partners for all debts and obligations of the firm incurred while he is a partner. Execution will not issue against partnership property except on a judgment against the partnership firm.
Absent any contractual obligation such as a guarantee or a parent company being complicit in the wrongdoings of a subsidiary, a parent company will not be held liable for an insolvent subsidiary company's debts except for situations where creditors can pierce the corporate veil.
A third party can be held liable for the debts of an insolvent company if that person has taken part in the management of the company in circumstances that amount to fraudulent trading, even if that person is not a director. A person who has knowingly assisted a director to commit a breach of his fiduciary duties or other wrongdoing to the company can be held liable for the loss to the company subject to any lawful indemnity afforded to the director.