Personal liability of administrators and representatives of companies Comment on a ruling of the Supreme Court of Justice

The liability of administrators and representatives of companies has been extensively discussed in the last years both by doctrine as well as by labor caselaw.

The liability thereof arises from section 59 of Law No 19,550 (“Companies Law”) which sets forth, in the section on the administration and representation of companies that:

“The administrators and representatives of the company must act with loyalty and with the diligence of a good businessman. Those not performing their obligations shall be jointly and unlimitedly liable for the damages resulting from their acts or omissions.”

From the analysis of the Companies Law and the Employment Contract Law, it can be concluded that the administrator or representative of a company incurs in fraudulent practices and is jointly liable when contravening the obligations derived from the duty to act in good faith, as a good businessman and a good employer (sections 59, 157 and 274 of the Companies Law and sections 62 and 63 of the Employment Contract Law).

As an example we can mention the interpretation made by certain labor caselaw, which sustains that the hiring of employees who are not duly registered or not registered at all in the labor and accounting documentation of the corporation, constitutes a clear event of abuse of process to the detriment of employees and social security entities. The affected employee has the right to file the corresponding individual action against the employer company and the administrators that have performed the injurious conduct, abuse of labor rules and infringment of the provisions of section 274 of the Companies Law.

This resolution was based on the sustentation that the chairman of a corporation’s board of directors is, under the provisions of section 274 of the Companies Law, unlimitedly and jointly liable to third parties for the violation of the law, if they are unable to prove having opposed such corporate action and that they registered their complaint and gave notice thereof to the supervisory committee, as that is the only way they can be exempted from such liability (CNTrab., Division III, 19/2/98 “Duquelsy, Silvia v. Fuar S.A. et al”).

Therefore, as the existence of labor frauds such as non registered or unduly registered labor relations has been confirmed at court, some labor judges have sentenced the employer corporation and extended liability to the administrator carrying out the unlawful conduct.

On the other hand, commercial courts caselaw has stated that, as with all rules setting forth joint liability, and the existence of intentional misconduct as the subjective factor to determine the liability, the rule has to be of restrictive interpretation and application. The party invoking same is charged with the burden of the proof and, principally, responsible for proving the responsibility attributable in the matter in question to each partner, controlling person or administrator. The above cited criteria was supported by Division III of the National Court of Appeals on Labor Matters in the case “Aguirre, Simeón v. Sardelick, Antonio” (D.T. 1989-B, 1360).

Recently, on October 31, 2002, the Supreme Court of Justice, in the case “Petition in error filed by Julio Jewel Kancepolski in the case entitled Carballo, Atilano v. Kanmar S.A. et al”, revoked the judgment of Division IX of the National Court of Appeals on Labor Matters, which sentenced a director of a corporation to the payment of a labor compensation, jointly with the corporation.

The lower judge considered that evidence had been duly provided that the plaintiff worked in an employee-employer relationship for the defendant Kanmar S.A. and extended the obligations arising from the employment contract to a group of companies, on the basis of the existence of fraudulent maneuvers and imprudent conduct, giving rise to the joint liability set forth in section 31 of the Labor Contract Law. He extended such liability to the co-defendant. Kancepolski, on the basis of the provisions of section 59 of the Companies Law.

To issue this decision, he took into account the fact that the defendant, Kanmar S.A. did not exhibit the accounting expert’s report offered in the file, judging that such omission was an indication that the irregular conduct indicated in the complaint had existed, and that such liability could be extended to related parties.

The Supreme Court of Justice’s prosecuting attorney considered in his opinion, which was supported by the members of the Court, that the judgment had affected the constitutional guarantees invoked by the appellant, relating to property and to defense at trial, as the sentence issued against the corporation had been extended to a director, subverting the rules on the burden of the proof applicable on the matter.

He further stated that labor judges applied a provision of the Companies Law that does not constitute a reasoned derivation of the law in force, as it contravenes essential principles of the corporate regime. Nor did they consider that the different legal personality of the corporation and their administrators constitutes an axis supporting all the rules on sociedades anónimas (corporations). Such rules form a special regime, based on the fact that they are a tool that legal order provides for trade as one of the principal driving forces of economy.

Therefore, the prosecuting attorney concluded that it is not reasonable that the mere report of the plaintiff, without mentioning other evidence produced in the case, should have the capability of entailing the application of a cause of liability which in corporate matters is of an exceptional nature, if not duly justified.

On account of that, he motioned to support the exceptions related to the fact that the judgment had not considered certain matters relevant for an adequate resolution of the case, as it did not take into account the objections of the appellant relating to the lack of evidence regarding the events entailing application of section 59 of the Companies Law.

The Supreme Court’s judgment is of vital importance and determines the correct interpretation of the rules in force of the Corporations Law on the matter.

We consider that the labor judges who, without further ado, extended liability to the administrators of corporations should adjust their judgments to the doctrine set by the Supreme Court of Justice in the ruling under analysis and change their current criterion which goes against legal certainty.