The article examines the various hypotheses regulated in the Commercial Act, in which a partner-founder of a limited liability company or a shareholder-founder in a joint-stock company may incur liability for damages.
1. Introduction
For the performance of economic activities, the legislator has foreseen the possibility for natural persons, either independently or in partnership with other natural or legal entities, to create new legal subjects – legal entities. What is important in this case is that these newly formed legal entities represent independent legal entities – different from their founders. These legal entities, and not the persons participating in them, bear independent rights and obligations.
The two most common types of commercial companies, both in our country and in Europe, are the limited liability company (better known as OOD) and the joint-stock company (AD). The limited liability company is used as a legal form more often for small and medium-sized businesses, while the joint-stock company is more suitable for collecting serious investments and implementing larger business projects. The attractive thing for entrepreneurs in these two types of commercial companies is that the persons participating in them, such as partners and shareholders, cannot be liable with their property for the obligations of the legal entity.
This is one of the ways for natural and legal entities-entrepreneurs to limit their liability to their participation in the capital of the company and to assess for themselves how much they can risk when starting any business initiative.
This principle is valid in all cases of transactions, to which the company itself is a party. However, there are certain scenarios where it is necessary to protect the interests of both the company itself and third parties. In these cases, the legislation stipulates that the founders (partners or shareholders) of the company itself bear civil liability.
In this presentation, we will look at some of the most common exceptions where, in principle, limited liability persons can have unlimited liability.
2. Liability of the founders of commercial companies (Art. 69 and 118 of the CA)
1. Liability of the founders towards third party counterparties
Due to the dynamics of trade turnover, the state seeks to limit administrative obstacles for traders and encourage entrepreneurship. That is why the Commercial Register at the Registration Agency was created years ago, which significantly reduced the time and costs of registering commercial companies. In this way, among many other reforms, such as the reduction of the minimum required capital for the establishment of an OOD to BGN 2, start-up businesses were greatly facilitated.
Nevertheless, the legislator has provided for the possibility for entrepreneurs to start their activities even before they have registered their commercial company, having provided that all assumed rights and obligations pass by right to the company after its registration. However, the law also sets some restrictions and imposes additional responsibility on the founders of commercial companies, which perform actions on behalf of the not yet established legal subject (legal entity) – a commercial company.
According to the text of the law (Art. 69 of the Commercial Act), the founders of a commercial company have the right to perform actions on its behalf, but at the same time bear personal and unlimited liability for them until the moment the company is entered in the Commercial Register. After the registration of the company, the rights and obligations assumed by the founders pass to the company, in case the following conditions are met:
- that legal actions have been carried out. Such legal actions are not limited to concluded contracts, but they must still be such actions as can be performed by a commercial company. I.e. a commercial company cannot adopt or enter into a marriage, nor can employment contracts be concluded in advance, due to the very nature of employment relations. An example of such a transaction on behalf of an unincorporated company is the opening of a bank account. Another example is the conclusion of a preliminary contract and the payment of a deposit under it, or the payment of an advance under a contract for the supply of materials, etc.
- when conducting negotiations and concluding transactions on behalf of a company in the process of being established, it is necessary for the founders to inform their counterparties that the actions are being carried out on behalf of the not-yet-established commercial company.
- the persons who performed the transactions or legal actions are the founders (partners, shareholders) or persons authorized by them (for example, managers or persons authorized to perform certain actions).
In the presence of the above-described prerequisites, the responsibility for the obligations assumed before the establishment of the company passes to the newly established company automatically (by virtue of the law) without the need for an additional express act (for example, signing an annex, signing a contract, etc.).
In case that the company is not entered in the Commercial Register, the persons who performed the specific actions, respectively assumed the rights and obligations, bear joint and unlimited liability for the assumed obligations. For example, two of the founders conclude an office rental contract on behalf of the company in the process of establishment, and two others enter into a contract for the supply of materials. In case that the incorporation doesn’t happen for one reason or another, the parties to office rental contract will be jointly and severally liable for the obligations under it, but not for the obligations under the contract for the supply of materials concluded into by the other two incorporators. They on their part, will not be responsible for the obligations under the concluded rental contract. This is precisely what the law states that “the persons who concluded the transactions are jointly and severally liable for the assumed obligations”.
This rule represents the protection of third parties, counterparties of the company being established. If the company does not come into existence, and accordingly the obligations do not pass to it, the responsibility must be assumed by someone. In such a case, the legal authorization is logical, that the founders, who have performed the relevant legal actions, bear unlimited and joint liability for the assumed obligations. They are also the persons against whom claims can be made for the fulfillment of the assumed obligations, including by court order.
2. Liability of the founders towards the company itself
n the matter governing the establishment of the limited liability company, we find a manifestation of the responsibility that the founders bear, but this time it is a question of responsibility towards the company itself.
In the Law (Art. 118 of the Civil Act) provides that the founders are jointly and severally liable to the company for the damages they caused during its creation, if they did not exercise the care of a good trader.
Therefore, the first prerequisite for liability to arise is to have performed actions that caused damage to the limited liability company. The cited provision protects the partners in the limited liability company, in cases where one of them has undertaken obligations on behalf of the company being established, which were unprofitable and the company suffered damages as a result. Such liability may also arise if the founders, prior to the establishment of the company, have taken on liabilities whose value exceeds the amount of the subscribed capital, when a subject of activity that does not correspond to the company’s capabilities has been entered. Such responsibility also arises when the founders have committed actions that damage the name of the future limited liability company.
The second prerequisite for the emergence of liability is that the founder, whose actions damaged the company, did not exercise the care of a good trader. “The care of a good trader” should be understood as an abstract criterion for professional, committed and correct behavior in relation to the interests of the company. This is the care that every trader is expected to exercise in the management of his own affairs. The concept can be interpreted differently depending on the action performed, but it can be summarized as taking all the necessary actions to achieve the best possible result for the company while complying with all the requirements of good commercial practice.
3. Liability in the event of late payments upon establishment of the company
The limited liability company and the joint-stock company also fall into another classification – they are capital trading companies. This means that when establishing them, the future partners or shareholders through contributions form capital (the minimum of which is determined by law for each of these companies), which, in principle, should serve as the initial material basis for starting the company’s business activity.
Therefore, the question arises, what happens if a partner/shareholder is late in paying his contribution to the capital of the company being incorporated? The law regulates this hypothesis, both in the part for the limited liability company and in the part for the joint-stock company:
- According to Art. 121 of the Commercial Act, non-payment or non-contributed of the share is grounds for the exclusion of a partner from a limited liability company. In addition, this partner owes legal interest for his delay, as well as indemnities in the event that any damage to the partnership has occurred as a result of his delay. When the share cannot be paid or contributed by the partner who owes it, and there is no possibility of it being sold to another person, the other partners are obliged to pay the shortfall in proportion to their shares or to reduce the company capital with it in the corresponding order.
- According to Art. 189 of the Commercial Act, shareholders who do not make the agreed installments on time also owe interest for late payment. It is further recorded that in the statute may be provided and a forfeit. I believe, that there is no obstacle by analogy to assume that a forfeit can also be stipulated in the article of association of the limited liability company. Non-payment of contribution by a shareholder is also grounds for his exclusion. In fact, this is the only scenario in which a joint-stock company shareholder can be excluded from the company. The situation with a limited liability company is far from that, because there the partner is expected to make efforts and actively participate in the development of the company’s activities.
3. Conclusion
Participation in a business venture in any form is an activity that must be approached responsibly. In the course of the article it was clarified that partners in limited liability companies and shareholders in joint-stock companies are not responsible for the obligations of the company they are members of to third parties. Nevertheless, they should not treat with indifference the obligations that arise for them in connection with the establishment of these companies, because in the presence of certain circumstances they may be liable for damages, which they must cover with their personal property.
Nina Stoeva
Managing partner