Derivation of the social security debt to the administrator
Liability of the director of the limited company
If a company fails to pay its employees’ social security contributions, it will be liable for payment. However, sometimes the administrators are jointly and severally liable and the social security authorities claim the debt from them.
In order to claim the debt from the administrator, the General Treasury of the Social Security (TGSS) can ask the Labour Inspectorate to investigate whether the administrator can be declared jointly and severally liable.
In other cases, the Labour Inspectorate acts on its own initiative and ends up finding that the administrator is jointly and severally liable.
Derivation of social security debt by Dissolution SL
Dissolution by law
The Capital Companies Act establishes the circumstances in which a company must be dissolved.
For example :
- By cessation of the activity that constitutes the company’s corporate purpose (cessation is understood to have occurred after a period of inactivity of more than one year).
- By losses which reduce the net assets to less than half of the share capital, unless the latter is sufficiently increased or reduced.
- For any other cause provided for in the articles of association.
When a company is wound up, the director has two months to convene a general meeting to adopt the dissolution resolution or such resolutions as are necessary to remedy the situation (e.g. a capital increase).
- If it does so, it will not be liable for the company’s debts.
- However, if the meeting is not convened or is convened out of time, he is jointly and severally liable for the debts after the time of the cause of dissolution, including social security debts.
The directors are not obliged to convene the general meeting to adopt the resolution of dissolution when they have filed for insolvency proceedings or have notified the court of negotiations with creditors to restructure assets, liabilities or both.
Dissolution due to losses
In order for the Social Security Inspectorate to refer the company’s debts to the administrator, it must check:
- That there is legal cause for dissolution. The most common case is when the company has losses that reduce the net worth to less than half of the share capital.
- Verification of this cause is simple: the Inspectorate only has to request the annual accounts or the corporate tax return and verify the losses.
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That the company has debts with Social Security that are not time-barred.
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You should also check who the directors have been since the cause for dissolution arose. To do this, you should request the deeds of incorporation and the deeds of cessation and appointment of directors, as well as the company bylaws.
If the company does not submit the annual accounts to the Business Register or the corporate tax return, the inspector will be able to prove the company’s insufficiency of assets through other evidence (for example, through the Social Security debt).
Remember that the net worth is the money initially contributed by the shareholders to the company, plus the company’s results (profits or losses). Other items, such as subsidies, are also included.
Example of dissolution:
A company closed the financial year 2022 with net assets of EUR -6,000 and share capital of EUR 3,000.
If it has debts with the Social Security and the administrator did not call the meeting to adopt the resolution to dissolve the company or increase the capital, the administrator will be jointly and severally liable for the Social Security debts generated as of 1 January 2023 (the net worth is less than half of the share capital).
How to avoid the derivation of the company director's social security debt?
Two-month deadline for convening the general meeting
When does the deadline for convening the meeting begin?
As mentioned above, the law gives the administrator a period of two months to convene the meeting to adopt the dissolution resolution or those resolutions that are necessary to remedy the situation.
The two months start to run from the date on which the annual accounts are drawn up, at which time the director may become aware of the cause for dissolution of the company.
Example of a meeting notice
If a company closes its financial year on 31 December (this is the most common), the deadline for drawing up the annual accounts is 31 March (three months from the end of the financial year).
Therefore:
- If the accounts are formulated on 31 March, the director has until 31 May (two months) to convene the general meeting. If he fails to do so, he will be liable for social security debts accrued since 1 January.
- If the accounts are prepared earlier, e.g. on 20 March, the two-month period ends on 20 May.
After the deadline
If the administrator convenes the meeting but does so after the two months have elapsed, he will still be declared liable for the debt, although this liability will be limited to the time at which he convened the meeting.
Derivation of the Administrator's Debt
Since January
Contributions to be paid in February
As indicated above, the social security debts owed to the administrator are those that accrue from the time the cause for dissolution arises.
As the cause of dissolution occurs on 1 January, the administrator is liable for the debts accruing from that date.
Example of company director liability
A company owes 7,500 euros, corresponding to the contributions for December (2,500 euros paid in January), January (2,500 euros paid in February) and February (2,500 euros paid in March).
However, the administrator will only be liable for a debt of 5,000 euros, corresponding to the contributions for January and February. Although the December contributions are paid in January, this debt actually belongs to the month of December.
In the General Scheme, the statutory period for payment ends on the last day of the month following the month in which the contributions accrued.
Amount and statute of limitations for the liability of a director of a company
The totality of the debt
In these cases (in the case of joint and several liability), the debt owed to the administrator comprises the principal (the instalments due), surcharges, interest and costs.
However, the administrator is not jointly and severally liable for the payment of penalties, even in the case of a fine imposed by the Social Security Inspectorate.
The administrator is only liable for surcharges on benefits resulting from accidents at work and occupational diseases if the INSS declares that they were caused by a lack of safety measures at work.
Four years of liability of the administrator
The debt that can be derived from the administrator will be that which is not time-barred. Debts for Social Security contributions expire after four years.
However, in practice the claim period may be longer than four years.
Specifically:
- The limitation period is interrupted by any action by the TGSS or the Labour Inspectorate leading to the claiming of the debt .
- Therefore, if the TGSS claimed a debt five years ago, the limitation period for that debt will have been interrupted and the administrator can still be claimed (even if more than four years have passed).
In these cases, the limitation period for the action against the administrator, which is four years, also applies.
In other words, the action against the administrator ends four years after he left office.
It is common for the Treasury or the Inspectorate to claim Social Security debts jointly and severally from the administrator when he/she has failed to comply with his/her obligation to call a meeting to dissolve the company.
