JOINT AND SEVERAL LIABILITY OF LEGAL REPRESENTATIVES IN LIMITED LIABILITY COMPANIES, JOINT STOCK COMPANIES AND SIMPLIFIED JOINT STOCK COMPANIES IN CORPORATE MATTERS
The purpose of this article is to make a general review of the regulations of the Companies Law (CL) on the cases in which the legal representative (LR) of a limited, stock or simplified stock company has joint and several liability in corporate matters. This analysis does not include the joint and several liability of the LR in labor, social security or tax matters.
- General Concept – The general concept of the Companies Law governing the actions of the LR is that he/she will have joint and several liability when his/her acts have been executed with wrongful intent. Other legal figures indicated in the CL, such as fraud to the law or abusive purposes to the detriment of third parties, delivery of false information, among others, are framed within the concept of willful misconduct.
- Willful misconduct.- The Civil Code establishes that gross neglicence is equivalent to willful misconduct, so if the actions of the LR have been unwise, negligent or with “the positive intention of causing harm to a person or to someone else’s property”, he/she will be jointly and severally liable for the damages caused.
- Fault in the limited liability company. Art. 125 of the CL, applicable to limited liability companies, requires a greater liability from their LR, since it establishes that they are required to proceed with the diligence required by an ordinary and prudent commercial administration, that is to say, that they are liable even for slight fault or negligence, Therefore, their actions that do not fall under this concept generate joint and several liabilities before the company and third parties for the damages caused, except in the case in which the LR acted in accordance with a resolution adopted by the General Shareholders’ Meeting, after having timely called the attention of the Board to the possible consequences of this resolution.
- Responsibility for the truth of the company’s information – Art. 256 applicable to corporations and subsidiarily to limited liability companies and simplified joint stock companies establishes the joint and several liability of the legal representatives (LR) with the company and third parties in the following cases: 1. for the truth of the subscribed capital and the truth regarding the delivery of the assets contributed by the shareholders; 2. for the actual existence of the dividends declared; 3. for the existence and accuracy of the company’s books; 4. for the accurate compliance with the resolutions of the general shareholders’ meetings; and, 5. in general, for the compliance with the formalities established by the Law for the existence of the company.
- Liability of the subrogated LRs – The alternate or subrogated LRs shall be jointly and severally liable in the same cases as the incumbent LR, but only when they have exercised the functions inherent to the position and only with respect to these actions; therefore, as long as they do not act, they are free from liability.
- Liability of the LR for authorizations of interested shareholders – In case of an authorization given by interested shareholders, the LR will be exempt from liability if he/she obtains the authorization of the general shareholders’ meeting with the votes of 75% of the concurring capital, provided that the act has been carried out under normal market conditions and the LR has acted with the diligence required by ordinary and prudent business administration, and that he/she has timely called the attention of the Board to the possible consequences of this resolution. However, the LR will be liable if the authorization of the general shareholders’ meeting was obtained on the basis of votes cast by a majority of shareholders having a direct or indirect interest in the transaction other than that which results from their status as shareholders, or if the transaction was not carried out under normal market conditions.
- Liability for the declaration of dissolution and liquidation: As of the execution of the deed of voluntary and anticipated dissolution, the LR of the dissolved company may not initiate new operations related to the object of the company. Any operation or act alien to this purpose will make the LR liable in an unlimited and joint and several manner.
- Responsibility of the liquidators – If fraud, negligence or misuse of the assets or property of the company in liquidation is proven in court, the liquidators and the LR in charge of the liquidation who have distributed the corporate assets among the partners or shareholders without having covered all the corporate liabilities or, otherwise, deposited the amount of the credits, shall be jointly and severally and unlimitedly liable for the unfulfilled obligations subsequent to the cancellation of the registration of a company.
If the liquidators and the LR in charge of the liquidation have not applied the order of priority of credits provided in the Civil Code, or if fraud, negligence or misuse of the assets or property of the company in liquidation is proven in court, they will be liable for the damages caused.
The liquidator appointed by the Superintendency of Companies, Securities and Insurance (SCVS) shall not be liable for the obligations of the company with the Ecuadorian Social Security Institute that arose prior to his/her appointment or that arise as a result of the liquidation of the company, unless the order of priority provided in the Civil Code for the payment of claims is not applied, or, if the company has resources, the company fails to pay the obligations.
 “Art. 29.- Serious fault, serious negligence, or gross negligence, consists in not handling the business of others with the same care that even negligent and not very prudent persons usually use in their own business. This fault, in civil matters, is equivalent to willful misconduct.
Slight fault, slight carelessness, light carelessness, is the lack of that diligence and care that people usually employ in their own business. Fault or carelessness, without any other qualification, means slight fault or carelessness. This kind of fault is in opposition to ordinary or medium diligence or care.
The one who must manage a business as a good father is liable for this kind of fault.
Very slight negligence or carelessness is the lack of that careful diligence that a judicious man employs in the administration of his important business. This kind of fault is opposed to extreme diligence or care.
Willful misconduct consists in the positive intention of causing harm to a person or to someone else’s property”.
This article contains information of general interest and does not constitute legal advice about specific matters. Any particular analysis will require the Firm’s legal advice.