Personal liability for business corporation partners – Comments on Supreme Court decision “Palomeque, Aldo René vs. Benemeth S.A. y otros”

In Marval News # 13 of December 20, 2002, we discussed the Supreme Court Decision in the “Carballo vs. Kanmar” (October 31, 2002) case. We mentioned then that the extension of liability of business corporation administrators and representatives in labor and social security matters has been a heatedly debated issue in recent years by both legal scholars as well as in labor law court decisions.

We mentioned at the time that said liability arises from article 59 of Law No 19,550 (Law of Corporations) that, under the title of administration and representation in business corporations provides for the following:

"Administrators and representatives of a corporation must act with the loyalty and diligence of a good businessman. Those who fail to perform their obligations have unlimited, joint and several liability, for damages resulting from their action or the lack thereof."

We noted at that time as an example the interpretation of certain labor law court decisions, that hold that employment personnel that is unduly registered or is off the books, in corporate management and accounting, constitutes a clear case of the abuse of rights to the detriment of dependents' rights and to social security agencies The affected worker is in a legitimate position to initiate the corresponding personal action against the employer and the administrators that have carried out such damaging behavior by abusing labor standards or infringing the guidelines of article 274 of Law No 19,550 (1).

Such was the decision advocating that the Chairman of the board of a corporation, by virtue of the provisions of article 274 of Law No 19,550, must answer with unlimited joint and several liability before third parties for violation of the law, if not able to prove that he or she had actually opposed such corporate action, or cannot attest to his or her opposition and notification to the syndic, the sole means whereby he or she could prove to be exempt of liability (2).

On the other hand, the commercial law court decisions stated that as any other norm establishing joint and several liability, and even more so malicious failure to perform obligations as a subjective factor for attributing liability, the norm in question must be of restrictive interpretation and application, the burden of proof to lie with the party invoking same, and basically, that of proving the liability attributed in the particular event to each partner, controlling interest or administrator. The criteria cited above was sustained by Room III of the National Court of Labor in the case: "Aguirre, Simeón vs. Sardelick, Antonio" (3).

In the “Carballo, Atilano vs. Kanmar S.A.” case, the Supreme Court revoked the decision of Room IX of the National Court of Appeals in Labor Matters that had decided payment of severance pay by a member of the board of directors, being joint and severally liable with the corporation.

The Prosecutor Attorney for the Supreme Court in his finding to which the members of the Court adhered, estimated that the lower court's decision had violated the constitutional guarantees invoked by the appellant, in relation to property rights and the right to defense in court, insofar as the ruling against the corporation had been extended to cover a member of the board of directors, thereby subverting the rules regarding the burden of proof applicable to these matters.

The Prosecutor Attorney likewise stated that the Labor Court Judges had applied a provision of the Law of Corporations that is not reasonably derived from the law in force, as it opposed the essential principles of the corporate system. Also said judges did not take into consideration that the different legal corporate existence of the corporation and its administrators constitutes the grounds on which business corporation norms are based, and that such norms conform a special system in that said corporations constitute a tool that the legal order provides to business as one of the principal engines of the economy.

Consequently, the Prosecutor Attorney concluded that it is not reasonable that the simple description by the plaintiff without mentioning the backing of other proof produced in the cause may have derive in the application of grounds for liability that in corporate law are of an exceptional nature, without the necessary justification.

By virtue thereof, the government attorney proposed finding for the claims related to the fact that the decision had omitted treatment of matters leading to an adequate solution of the cause, so that the decision did not take on the objections made by the appellant in relation to the lack of accreditation of the circumstances meriting the application of article 59 of the Law of Corporations.

Under these circumstances, in re “Palomeque, Aldo René c. Benemeth S.A.” the Supreme Court once again analyzes liability but in this case that of the partners and managers of business corporations.

Room X of the National Court of Appeals in Labor Matters found partners and managers of the corporate employer joint and several liability to cover the based on the following: a) the practice of not recording nor documenting a part of wages agreed to and paid, constitutes a fraud in labor and social security matters; b) the lack of registration of workers’ wages constitutes the means with which to violate the law, public order, good faith and to frustrate the rights of third parties (the worker, the social security system, the pension system and the business community); c) the plaintiff was not correctly registered and therefore it is appropriate to apply the piercing of the corporate veil to hold the partners of the business corporation liable(article 54, Law No 19,550).

Article 54 of Law No 19,550 establishes that "The action of a corporation that by concealing the search for extraordinary aims, constitutes a mere means to violate the law, public order and good faith or to frustrate the rights of third parties, shall be directly attributed to partners and controlling interest that made it possible, and who shall answer joint, severally and unlimitedly for the damages caused”.

The Prosecutor Attorney of the Supreme Court, in his finding to which the members of the Court adhered, estimated that the decision of Room X is not reasonably derived from the law in force in relation to the circumstances proven in the case, whereas it has not been proven that it was a fictitious or fraudulent corporation, organized through an abuse of the law, and with the purpose of violating, taking advantage of the corporate veil, thereby affecting the public order in labor matters or in the evasion of legal norms.

Moreover, the Prosecutor Attorney stated that the evidence produced in the case in question was not enough to apply a ground for corporate liability of an exceptional nature, without sufficient and specific justification.

This new decision by the Supreme Court, like the one discussed at an earlier date, proves to be of vital importance and makes a reasonable interpretation of the Law of Corporations in relation to these matters.