The officer’s personal liability under the new Civil Code
Joaquim Manhães Moreira*
The legal entity undertakes commitments or incurs liabilities for acts or omissions on the part of its officers and attorneys-in-fact. In order to assume obligations on behalf of and for a company, an officer has to hold formal powers conferred upon him under the articles of association or under another instrument.
The New Civil Code contains various provisions regulating the exercise of the company’s management. In this article we will focus on the principles applicable to managers of the “simple” companies and so-called limitadas, keeping in mind that the rights and obligations of the officers of corporations (sociedades anônimas) continue to be governed by specific legislation.
The officers of the simple and limitada companies can either be stockholders or other professionals that do not hold such condition.
Such persons placed in charge of company management should perform their duties and liabilities established in the Code. The failure to perform such obligations can generate internal punishments such as, for instance, the removal from Office.
But the Code also sets forth hypotheses in which the officer’s failure to perform or irregular behavior gives rise to a personal civil liability.
The consequence of the officer’s personal civil liability is that his private assets become liable for the company’s obligation or for indemnity or repair due to the stockholders themselves or to third parties, as the case may be.
The Code provides various theories in which the officers will be held personally liable with their respective assets for acts performed in the management of the companies. Such cases are commented below.
(1) Deviation of purpose and asset confusion.
The first event of such type of liability arises from the disregard of the corporate entity of the company. The Code establishes that the Judge can, at the request of the interested party, cause certain obligations to fall on the stockholders’ or officers’ personal assets.
This remedy can only be applied in the events of:
(a) Deviation of the company’s purpose, i.e., its usage for purposes alien to its economic purpose contained in the articles of association; and,
(b) Confusion of assets. This practice is characterized by the use of the company’s assets or rights for the benefit of its officers.
(2) Distribution of illicit or fictitious profits.
The officer that carries out the distribution of illicit or fictitious profits to the stockholders is personally liable before the company.
The stockholders who are aware of the irregularity will be jointly liable with the officer.
The penalty will be payment to the company of the profits distributed, and of any losses it may have been caused.
The provision imposes on the officer severe duties of diligence in the evaluation of the assets and liabilities of the company, and of the revenues, expenses and costs. Ordinarily, the officer receives compensation and awards in proportion to the good results he produces. This is why the Code is concerned about avoiding his making errors, omissions, frauds or placing the company at risk to show a better result of his management.
There are situations in which the officer must decide according to the counseling of its specialized advisors, generally accountants, about the best evaluation of certain accounts to be reflected in the financial statements. And this decision may generate a greater or smaller volume of profits.
In order to avoid that decisions taken in good faith generate a personal liability as mentioned above, the officers should resort in the assessment of the equity and results of the company to:
(a) legal methods and criteria, when specific or when they can be applied by analogy in accordance with the following order: firstly, those contained in the commercial laws, and later those of civil laws and finally those of tax laws;
(b) methods and criteria contained in the regulations of organizations in charge of inspection of the markets, such as the Brazilian Securities Commission (local acronym CVM) and the Central Bank of Brazil;
(c) methods and criteria published by associations of technical professionals in the subject matters handled, such as institutes of accountants and of auditors, keeping in mind, however, that in certain matters the opinions of lawyers, engineers, doctors and other professionals need to prevail over those of accountants, subject to the penalty of inaccuracy;
(d) methods and criteria published by international organizations engaged in the matter, such as the FASB (Financial Accounting Standards Board).
Besides the above cautions, in doubtful cases the manager should obtain a specific opinion from the company’s consulting services, whether legal, auditing and others. Also, there is nothing to prevent the company from submitting the matter to the Audit Committee when it exists, even if it is not installed.
What the officer should not do under any circumstance whatsoever is adopt the criterion that is most favorable to the result, with or without the consent of the officers, without the due technical support, as this will result in personal civil liability.
(3) Delay in the registration of the instrument of appointment.
When the officer is appointed by a document other than the articles of association, the officer should immediately provide registration of this instrument with the company registry, i.e., with the Commercial Registry if the company is a business company, or with the Civil Registry of Legal Entities if it is a simple company.
The officer will be personally liable, jointly with the company, for all the actions he practices while he has not provided for the mentioned registration.
It is common knowledge that, in practice, the registration can take a long time due to reasons alien to the company or to the officer. And the company may require the practice of management actions during such period.
In these circumstances, the proper action is for the officer to provide for certified copies of the instrument of appointment and to deliver them against receipt to the economic agents with which it should establish binding relationships on behalf of the company.
(4) Action or decision in disagreement with the majority.
The officer responds for losses and damages before the company or before the stockholder or group of controlling stockholders if he takes any action or decision that opposes it.
In order to establish this liability, the officer must be aware of the fact that he was going against the majority of the capital holders. The Code determines that he will incur this same irregularity when he has the duty of knowing he has opposed them.
The consequence of the opposition will be for the officer to use his own assets to indemnify the losses and damages.
In practical situations, the officer should avoid incurring this situation, firstly by requiring that the provisions of the articles of association or of the instrument that stipulates his powers, if different from the first, be clear and specific, preferably with quantitative limits of authority, i.e., maximum amounts that he is empowered to engage or decide upon.
In the second place, the officer should strictly respect the limits of the powers established in such documents and require that they be supplemented beforehand, whenever he is instated or authorized to act in excess of such powers by the stockholders that represent the majority of the capital. Therefore, he should never exceed his powers as specifically contained in the articles of association or instrument of delegation.
(5) Culpable and fraudulent acts.
The damages caused by fault in the performance of duties generate personal liability of the officer before the company as well as before third parties.
The officers are jointly liable in this case, i.e., all officers will answer with their own assets for any action or omission of one of them.
The Code requires the officers to adopt in the performance of their duties the same care and diligence as every active and upright man employs in the management of his own assets.
If the Code had required officers to take only the caution of upright men, they certainly would not need to worry about increasing the company’s assets, but only about maintainig it. At most, they could understand that to perform their duties it would only be necessary for them to keep the company dormant.
When the Code requires the diligence of an active man, it imposes upon the officers the duty to increase the company’s assets by using the market’s opportunities.
By performing these two duties, i.e., care and diligence, the officer cannot cause damage to the company as a result of a culpable action or omission, i.e., practiced with negligence, recklessness or ineptitude.
Negligence should be understood as carelessness in performing one’s duties. The officer that allows delays in the bookkeeping or in the preparation of financial statements, or who in any way consents to the loss of control of assets, rights and liabilities of the company, is acting negligently.
The officer that becomes aware of a business opportunity for the company and does not decide to take action to benefit from it also acts with negligence.
On the other hand, recklessness characterizes an attitude that is not part of the ordinary moderation of business, or which does not ensure a procedure devoid of acceptable failures or errors.
Finally, under Business Law, ineptitude should be understood as the direct practice by the officer, or authorized or agreed upon by him, of actions for which the performer is unskilled. It is also true that the company’s existence assumes that people will be hired whose performance of their duties after a while may prove to be unqualified.
However, ineptitude is characterized by the grotesque absence of qualification. For instance, the officer who requests a professional who does not have the proper legal training to defend him in an administrative tax case, is acting with ineptitude. His handing over the quality assurance of a plant to someone who does not have the required technical training for this purpose is likewise a case of ineptitude.
The officer avoids characterizing guilt: (1) restraining his actions, once again, within the limits of the power of attorney he receives; (2) complying with the goals and commitments assumed before the stockholders; and (3) always hiring personnel qualified and specialized in the various activities.
Besides the culpable acts, those acts practiced with malice also generate personal liability for the officer. In this case, if the officer has the intention of causing a damaging result or assumes the risk of producing it, he will be held liable before the company and jointly with it and its stockholders before third parties.
(6) Undue use of the company’s assets.
The use of assets or rights of the company for his own benefit and that of third parties will give rise to the officer’s personal liability. This liability implies the duty of returning the asset or right used and of bearing any losses caused to the company.
The use of the company’s funds for his own benefit or the benefit of third parties will, therefore, give rise not only to the obligation of refunding but also to the duty of paying interest to the company, computed based on the rates it was unable to earn, if the amounts had been invested, or that it is required to pay, if it is in a position of taking loans.
(7) Conflict of interests.
Conflict occurs when the officer has in any matter any interest contrary to that of the company. The Code imposes that the officer abstain from taking part in any decision in which he has any interest contrary to the company’s.
Abstaining should apply to every type of decision, whether of a commercial, labor, civil or any other nature.
If he takes part in the decision, the officer will be subject to sanctions that in the property sphere will result in his personal assets being held liable.
(8) Unauthorized replacement.
The officer may not make any replacement in the duties delegated to him. He may, however, appoint attorneys-in-fact within the limits of the powers he has received.
In daily activities the officer grants powers of attorney on behalf of the company he manages. When so doing, he has the obligation of inquiring about the actual qualification, capacity and ability of the attorney-in-fact to accomplish the purposes intended. If he fails to do so, he will be held personally liable.
If the officer causes his replacement without the written consent of the party that has granted him the powers, he will be liable for the actions of the substitute before the company.
The same principle applies to the agents, who are also not entitled to make replacements in the duties that have been assigned to them, subject to being held personally liable.
(9) Omission of the term “Limitada” or of its abbreviation in the use of the trade name or company name.
The inclusion of the term “limitada” in the use of the trade name or company name is indispensable for the security of those agents that enter into civil or commercial transactions with it.
This declaration is not the only means that the creditors have to know about the limitation, as they can also resort to the company’s records. However, the Code imposes such duty upon the officers as a form of moralizing the market, thus preventing companies from apparently placing at the disposal of their business associates, as collateral for their transactions, a set of assets greater than those which they actually have.
If the officer uses the trade name or company name without including the term “limitada”, he will issue a misleading message, which may induce suppliers to error. Therefore, by so doing, he will be held liable with his personal assets.
(10) Situations possible in the dissolution.
Once dissolution has begun, the officers should limit the company’s activities to completion of the pending business.
They are prevented from starting new business subject to being held jointly and unlimitedly liable.
Also the liquidator, who is an officer assigned with specific missions, must limit his action to the legal functions. He may, however, as from the beginning of the liquidation, fully pay the company’s past due debts, after having verified that the company’s assets are greater than the liabilities. However, by so doing he will assume personal responsibility before the stockholders and third parties that may feel jeopardized throughout or upon completion of the liquidation procedure.
The Civil Code is not the only law that establishes the officers’ personal property liability for acts practiced in the management of companies. There are also other laws such as those that define the violations against the economic order and free competition, against the tax order, or those that impose the duties of direction of financial institutions.
Besides this, the officer must not forget that there are other laws that define his criminal liability, which can only be personal, for acts practiced in the exercise of his duties. These rules contemplate offenses against consumer relations, labor relations, against the environment, against the economic and tax order, against laws that forbid money laundering and so many others.
* Advogado do escritório Manhães Moreira Advogados Associados