LIABILITY OF DIRECTORS AND OFFICERS UNDER ARGENTINA LAW (ENGLISH AND SPANISH)

• Jurisdiction: Derecho Internacional

Mining and Oil and Gas Law, Development, and Investment - Book 2
(Apr 2007)
CHAPTER 25B
LIABILITY OF DIRECTORS AND OFFICERS UNDER ARGENTINA LAW (ENGLISH AND SPANISH)
Tomás Insausti
Attorney
Estudio R. E. Seitún
Buenos Aires, Argentina

TOMAS INSAUSTI

Tomás Insausti is an attorney at the Seitun law firm since 2001, and obtained his law degree from the Argentine Catholic University (UCA). He focuses his practice in general commercial law, mainly corporate law and contracts. He has advised US companies in the acquisition of oil and gas fields in Argentina. Tomás has also actively participated in matters involving international service of process and enforcement of foreign court judgments in Argentina. After attending several graduate courses, he is currently an MBA candidate at the UCA, degree expected for 2008.

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1 Overview of the Argentine rules that govern the matters dealing with the liability of directors and officers

In this paper the term "liable" shall refer to someone who should pay damages or provide for an indemnification for having incurred in breach of an obligation.¹

If the Civil Law Code is the backbone of the Argentine legal system, and the main source of tort law, one should first attend to its rules when analyzing the liability or accountability of directors and officers.

General principles of the Civil law establish that the person who causes damage to another one must be held liable. Certain conditions must be met: there must be breach of a law (or contract), a damage, negligence or willful misconduct,² adequate cause-effect relation between the wrongful act and the damage. The Civil Code has gathered these principles.³ First sentence of Civil Code, section 1109, states "whoever does something, which for his/her fault or negligence provokes harm to someone else, is forced to repair the damage".

People acting as directors can be sued for damages, mainly, from three sources:

a) Damages to the company that retains their services;

b) Damages to the company's shareholders; and

c) Damages to third parties.

The Commercial Companies Act (CCA) (act number 19,550) contains the core set of rules regarding the

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responsibility or accountability of directors, in relation to the company and its shareholders mainly.⁴

Section 59 sets the general rule: "The administrators and representatives of the company must conduct themselves with loyalty and with the diligence of a good business man. Those who neglect their duties are jointly and severally responsible for the damages resulting from their act or omission."

Pursuant to the first paragraph of section 274 "the directors are jointly and severally accountable towards the company, the shareholders and third parties, for poor performance of their role, pursuant to the criterion of section 59, as well as for violation of the law, by-laws or corporation rules and for any other damage caused by willful misconduct, abuse of attributions or gross negligence."

The second paragraph of section 274 indicates that the liability allocation shall be made taking into account the "individual performance when roles had been assigned individually either through the by-laws, corporate regulations or shareholders meeting decision". For this specific exception to apply, the appointment of the board members must have been duly registered with the Public Registry of Commerce (section 274, second par.).⁵

The first conclusions that can be drawn so far regarding the conducts that may trigger the board members liability are:

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i. Poor performance, such "poor performance" to be judged under the general standard set forth in section 59: loyalty and diligence of a good business man;

ii. Violation of the law, the by-laws or the corporation rules; and

iii. Any other damage caused by willful misconduct, abuse of attributions or gross negligence.

Note that section 59 provides for a universal parameter, which does not in itself consider the particular intellectual condition or other capabilities of a director.

The CCA is the main Argentine corporate law, which rules apply to corporations and other type of companies, including limited liability companies (which under Argentine laws must always have at least two shareholders).⁶ Executive Order N 677/01 contains specific regulations for the corporations that trade publicly with the Bs. As. Stock Exchange. Introductory paragraph number 27 and section 8 of the EO 677/01 deal specifically with D&O responsibility issues:

i. According to para. 27, the "corporate interest" (interés social) is to be the "guiding principle" of the administrators' performance. Such corporate interest to be defined as the "common interest of all the shareholders", which includes the notion of "creation of value for the shareholders". Para. 27 also refers to the "duties of loyalty and diligence".

ii. Section 8 lists several directives regarding the conduct of directors, referring among others to: loyalty and diligence, preeminence of the common interest of shareholders, adequate means for conducting business, internal controls, use of corporate assets, non-competition,

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compensations, etc.⁷ The agency cost notion evidently floats in section 8's contents.

2 Liability of directors and officers in other bodies of law

Several other specific laws and regulations, some of which govern quite complex matters, determine the liability of the directors before third parties.

A) Labor laws

Directors may be -and have been- held liable in labor law courts. Labor courts have made directors personally liable on the basis of sections 59 and 274 of the CCA, in cases of fraud against employees' rights generally considered to be of public order status. Usually, the cases relate to personnel retained without proper registration or bookkeeping of labor relationship or under-the-table-wages.

In fact, courts have differentiated the eventual personal liability of the directors from the liability of shareholders, expressing that even if conditions for applying the piercing of the corporate veil⁸ doctrine are not met, sections 59 and 274 may still be applied to directors.

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B) Environmental laws

Different environmental laws, both federal and provincial, establish the liability of directors in cases of violation made by the company. As a way of sample:

i. National Toxic Waste Act (Act number 24,051) determines the joint and several liability of "the ones in charge of the direction, administration or management", when the violator is a legal entity (section 54).

ii. Wastes Act Number 3,250 of the Río Negro Province has the same rule as i. above.

iii. In section 22 of the National Environmental Policy Act (act number 25,675), companies that perform "risky activities for the environment, the ecosystems or their respective constitutive elements" must either obtain an insurance to guarantee the financing of eventual remediation or create a special "environmental remediation" fund that allows for recomposition measures.

Section 31 of the NEPA states that if a collective environmental damage is committed by a legal entity, the liability "shall be extended to its authorities and professionals, in the portion of their participation".

C) Forex market regulations

Foreign currency exchange market controls had disappeared during the nineties, but they have become newly in force as of January 2002.

Executive Order 260/2002 created an official market through which all foreign exchange operations must be made. EO 260/02 also appointed the Argentine Central Bank (BCRA) as the entity in charge of issuing the regulations that should govern such exchange operations. Since then, the BCRA has issued numerous communications, which are in many cases obscure or confusing.

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Forex market rules contain different sets of rules relating to the exchange of national currency -the Argentine Peso- for foreign currency: specific official market within the exchange must be made, caps, entities with which the exchange must be made. Violations to forex market rules are subject to the forex criminal regulations, mainly governed by the Currency Exchange Criminal Act (CECA) (act number 19,359).⁹

The CECA may also be applicable to operations that although do not in essence consist of an exchange operation are also an object of regulation by the BCRA forex market regulations. Among these: obligation to bring into Argentina exports proceeds, to inform about the debts with non-residents, transfer of funds abroad.

The CECA sets sanctions that range from fines to prison and withdrawal of authorization to conduct business. If a director performs an illegal operation (from the forex regulations aspect) on behalf of the company with means or resources provided or facilitated by the company, the applicable fine shall be jointly applied to the director and the company (CECA, section 2, f).

D) Tax laws

The Fiscal Procedures Act (act number 11,683)¹⁰ dictates that legal entities (which includes corporations) "must pay taxes to the collection agency in due time and form personally or through its representatives" (section 5, para. b).

Directors are responsible of the fulfillment of the tax debt of the company with the resources they "administer, receive or have available" from the company (section 6). They are jointly liable with their own assets when the tax is not paid in due time and only after the company fails to comply with the tax agency order to pay the overdue tax (section 8). Liability is exempted if the director evidences before the tax authority that the company "has put" him "in the impossibility of complying timely and correctly with the fiscal duties" (section 8).

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Authors agree that directors are not directly or automatically liable for the tax debts of the company, but that it's a case of substitutive responsibility or guaranty.¹¹

E) Bankruptcy

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