The Criminal Liability of Directors of Legal Persons vis-à-vis the State and Social Security Organizations - Cases of Lack of Liability

Legal Insight

January 2022

Christina Kapourani, M.Sc. (mult.), Pgcert, PhD Cand.

(republished from lawnet.gr)

Summary: In the context of the unfavourable economic situation we have been experiencing in recent years, which has recently intensified following the consequences of the pandemic (covid - 19), the issue of the criminal liability of representatives - managing legal entities (especially limited liability companies, as the main forms of business activity) against the State and Social Security Organizations, has become more relevant than ever. In the following, we will briefly try to outline the main offences provided for in the provisions of specific criminal laws that protect the fiscal rights of the State and Social Security Institutions (such as non-payment of debts, non-payment of social security contributions and tax evasion), in particular with regard to the determination of the persons liable when the party liable to the State is a legal person - company, with emphasis on cases where the latter are not criminally liable.

1. Introduction - Critical offences:

In order to protect public property - in a broad sense - and economic order, in the sense of protecting the expectations of citizens for the good management of public resources, the legislator has established a network of specific criminal provisions which criminalise, primarily, the failure to pay a certain amount of money to public funds. The most important offences of this category, which we encounter daily in the courtrooms, especially in the last years of the economic and pandemic crisis, are the non-payment of debts to the public (art. 25 of Law 1882/1990), the non-payment of social security contributions (art. 1 a.n. 86/1967) and tax evasion (art. 66 of the Tax Code, i.e. Law 4174/2013), while the status of defendants is very often held by the representatives - managers of the debtors, employers and tax offenders respectively of legal entities - companies. Specifically as regards the offences in question:

a) In article 25 of law 1882/1990, non-payment of debts to the state is always formalised in the form of a misdemeanour (for this offence, see also our earlier article). In this respect, the delay in payment for more than four (4) months by any natural or legal person of the established debt to the state, legal persons under public law (n.p.d.d.) or public sector organisations in general, provided that the total debt owed exceeds the amount of €100,000 (following the increase of this monetary limit by Law 4337/2015). The above four-month period starts from the confirmation of the debt by an act of the tax or customs authority. The penalty threatened in the law is imprisonment (i.e. up to a maximum of five years) and is graduated according to the amount of the debt.

b) The offence of non-payment of social security contributions (see in this respect our previous article here), then, as it is formalised in article 1 a.n. 86/1967 (as the latter is in force after the recent amendments by Laws 4321 and 4331/2015, which excluded from its scope and, consequently, from criminal prosecution freelancers insured by the Insurance Organization for Freelance Professionals and, in particular, by the Single Fund of Independent Employees, now part of the EFKA), also constitutes a misdemeanour. It is committed when the employer or employee liable fails to pay the contributions due to the Social Security institutions within one month of the date on which they became due. It is punishable by a minimum of three months' imprisonment and a fine for failure to pay employer contributions exceeding €20,000 and by a minimum of six months' imprisonment and a fine for failure to pay social security contributions withheld for the benefit of the debtor's employees and exceeding the monetary threshold of €10,000. 

c) Finally, Law 4174/2013 (Code of Tax Procedure, as amended by Law 4337/2015) in its article 66 standardizes tax offences by creating, in essence, three basic categories of criminal conduct (as was the case under the previous regime of Law 2523/1997). In particular, it provides for: i) tax evasion in income and real estate taxation (Art. 66(1a)), the main form of manifestation being the failure to submit a declaration or the submission of an inaccurate declaration with the purpose of reducing or completely concealing the taxable amount from the competent authority; ii) tax evasion in VAT and other withholding or imputed taxes and contributions (Art. 66 par. 1b), the main forms of which are the non-payment or inaccurate payment, the inaccurate offset or deduction or the misleading of the tax administration in order to avoid payment of the tax concerned, the improper offset or improper refund of the tax; and (iii) tax evasion carried out through the issue or acceptance of fictitious tax documents, (iii) tax evasion through the use of false or falsified tax information for transactions which do not exist in whole or in part, as well as through failure to comply with the rules for the correct issue and maintenance of tax information in accordance with the provisions of Greek accounting standards. As regards the penalties provided for, tax evasion is punishable as a misdemeanour if the tax due exceeds €100,000 per financial year and, in particular in the case of VAT, if it exceeds €50,000, while, when it comes to the issue or acceptance of false tax documents, it is sufficient for the offence to be punishable if the value of such documents exceeds €75,000. The tax evasion becomes a felony when the above amounts for income, VAT and fictitious items exceed €150,000, €100,000 and €200,000 respectively. In particular, as regards felony tax evasion on income and VAT, a provisional imprisonment of 5 - 15 years is imposed - after the reduction of the upper limit of the provisional imprisonment by the new Art. 2 CC - and for the felony of issuing and accepting false, forged and falsified false data, a provisional imprisonment of 5 - 10 years is imposed.

It should be noted, however, that after the new Art. 2 and 3 of the CC (effective from 1.7.2019), according to which ("2. Wherever in special criminal laws a penalty of imprisonment is threatened, a fine, as provided for in Article 57 of this Code, shall be added disjunctively ... 3. Where in special criminal laws imprisonment up to ten years is threatened, a sentence reduced in accordance with Article 83, paragraph c) shall be imposed (instead of the sentence of imprisonment, imprisonment of at least one (1) year or imprisonment up to eight (8) years shall be imposed). The act retains its felony character ... "), the penalties provided for in the above special laws shall be formulated accordingly.

2. The determination by law of the criminally responsible representatives - managers in these offences:

As mentioned above, the offences specifically described above are, exceptionally often, committed in the context of companies and concern their own obligations towards the public. The latter are, in most cases, managed by more than one person with a corresponding distribution of inter-company responsibilities and duties. In the absence of any provision in Greek law for the separate criminal liability of a legal person - as is the case abroad - (with sanctions such as a fine against the company, suspension of its operation, compulsory dissolution and so on), it is difficult to identify the perpetrators of the above-mentioned offences. In order to make matters easier, the legislator, in particular in the above-mentioned legislative acts, contains explicit provisions defining the persons criminally liable, creating, at first sight, the impression of a restrictive list of such persons and of presumed ex officio criminal liability, i.e. liability arising from the mere holding of a single position in the management of the company (chairman, managing director, member of the board of directors, partner, general representative, etc.). and so on), with no provision for substantial management involvement and fraud, i.e. knowledge of the act or omission in question (usually the debt in question). Specifically:

a) As regards the offence of non-payment of debts, Article 25 par. 2 of Law no. 1882/1990 states "In the following cases of debtors of the State and third parties other than private individuals, the penalties provided for in paragraph. 1 of this article shall be imposed also in order to. In the absence of all of the above persons, the penalties shall be imposed on the members of the boards of directors, provided that they actually exercise, temporarily or permanently, one of the functions referred to above .... for partnerships or limited partnerships, on the general partners and managers. for limited liability companies, to the managers thereof, and if there are none, to each partner, whether or not cumulatively." 

b) A similar provision exists in par. 7 of Art. 86/1967 on the non-payment of insurance contributions as well as in Art. 1 KΦΔ with the essential differentiation that, especially with regard to tax offences, with Law no. 4337/2015, a relevant paragraph 4 was added, establishing cumulative criminal liability of "instigators and participants who actually exercise the powers and responsibilities corresponding to the qualities and positions of paragraph 1".

3. Ad hoc cases of lack of criminal liability:

From the above legislative provisions that define the persons criminally liable for the alleged offences against public property, it follows that for the criminal prosecution, in addition to the other objective elements (cash receipt, arrears and monetary limits, non-submission or submission of inaccurate tax returns, etc. ), the formal status referred to in the law is sufficient, without the requirement of the effective exercise of management (in particular with regard to tax evasion for the category of persons legally liable), except in the case of members of the board of directors, when the first category of persons specifically mentioned (chairmen, managing directors, managers and generally authorised representatives) is missing, while no reference is made to vice-chairmen of the board of directors, as far as public limited companies are concerned.  However, the case law of our courts, in practice, interprets the above provisions with a view both to avoiding impunity for the actual perpetrators and to protecting directors who, de facto, could not have committed criminal acts or omissions in the absence, in particular, of participation in the legal person or knowledge of the usually criminal debt in question. A summary of the most important cases that have been discussed in the case law is presented:

a) Actual lack of status of representative - managing director due to resignation or termination of office: In order for the liability of the managing director - representative to arise, the latter must have such status in the liable corporate entity at the time in question of the commission of the act - omission that fulfils the essence of the relevant offence (confirmation or creation of the debt for non-payment of debts - with the following reservations, maturity of the debt for non-payment of insurance, expiry, e.g, the statutory deadline for filing a tax return in one of the ways of tax evasion, and so on). Therefore, if the person in question has legally renounced his or her status before the aforementioned periods or has acquired the relevant status subsequently, he or she should be exempted (see in this regard Athens Trial Chamber of the Plenary Court 29395/2017, which exonerates a member of the Board of Directors for non-payment of debts to the state as he or she did not have the said status either at the time of the attestation or at the time of the creation of the debt, as specifically provided for in Article 25 para. 3 ν. 1882/1990). In order for the loss or acquisition of the status to be legal, e.g, of the chairman, managing director or generally representative of a company should, according to the prevailing case law, have completed all publicity formalities in the GEMI (see in this respect also no. 1303/2017 AP in which "Indeed, the relevant declaration of resignation from the position and status of the above company's board of directors was submitted, however, the proper procedure, provided by law for the publication of the declaration in the relevant GGC ... The defendant was satisfied only with the resignation declaration and did not take the necessary actions, which were indeed recommended by the General Directorate of Development of the South Sector of Athens. Therefore, the accused must be declared guilty of the above act'). According to the same judgment of the above-mentioned judgment, the problem of lack of complete publicity could also be overcome after service of the corporate change by a bailiff (cf. e.g. the declaration of resignation from the status of legal representative of the company) to the person responsible for filing the application for criminal prosecution, i.e. the head of the competent tax office (an extract from the abovementioned decision has been quoted at '.... This is because, in this way, the right of the third party, and in this case the Greek State, to seek to attribute criminal responsibility is circumvented by the responsible persons, who, knowing the violation of their obligations, would bring to the knowledge of the third party their resignation, without it having been completed, but only by serving the document of resignation to the person entitled to apply for criminal prosecution (third party) .... , in which case they would be absolved of their criminal responsibility"). There is, however, also contrary case law according to which the formalistic waiting for the completion of any act of publicity is waived when it is factually evident that the resigned governors did not exercise management authority (Athens Court of Appeal, Athens, 723/2016).

With regard to those cases where the term of office of the persons responsible by virtue of their status has expired (such as, for example, the Board of Directors of an SA, including the automatic extension by law until the expiry of the deadline for convening the next general meeting, Art. 1, last paragraph of the last sentence of Art. 4548/2019) without, however, the necessary replacement actions having been taken (usually through negligence), the SC 533/2014 held "Therefore, the first plea raised in the present appeal, that the Court of the merits erred in its interpretation and application of the above provisions, because after the expiry of the term of the Board of Directors of the above company on 30-6-1998 and the non-election of a new Board of Directors, the term of the defendant, as Chairman, was extended by law (ex lege) and, therefore, he is implicated as the perpetrator of the crime of non-disclosure of F. VAT for the following five management periods (1998-2002), is unfounded, since, as stated above, the defendant's duties as Chairman of the Board of Directors of the aforementioned company ceased automatically at the end of the aforementioned five-year term of office (30-6-1993 to 30-6-1998)'.

Concerns have also been raised about the wording of para. 3 of Art. 1882/1990 according to which "For the persons mentioned in par. 2 of this article, criminal prosecution shall be brought for debts to the public and third parties other than private persons which were ascertained at the time of acquiring the above status or were ascertained during the period in which they had this status, regardless of whether they subsequently renounced this status in any way or for any reason, as well as for debts ascertained irrespective of whether or not the legal persons were dissolved, but which were incurred or date back to the time in which they had this status." It follows, therefore, that the administrator-representative is liable not only for debts established during his term of office but also for those incurred during the latter and established subsequently, even after he has been out of office for several years. This is problematic, however, as the person liable has no real influence on the management of the company to comply with the payment of the debt at the time of the assessment, since he will have already left the company. Despite its jurisprudential application (CC 1047/2013, 1312/2012, 1209/2011), the provision has been widely criticized and in practice is treated by the courts with the invocation of the lack of "in fact" management, as is the case in the following case law examples.

b) Formal status of representative - managing director and non-exercise of management "in fact": in practice, it is more than common for some persons to appear in the GEMI to exercise the management of a company and others to be the ones who actually exercise it (this is the so-called "de facto" management).  This is the case, in particular, in limited companies where a minimum number of board members is required (e.g. participation of a relative on the board of a family limited company) or in other companies for other reasons, which is due to the intention of the true beneficiary not to appear as such (mainly for tax purposes). Thus, despite the above apparently presumed criminal liability of certain persons, the latter can be exonerated if they claim that they had only a formal capacity and did not influence the decisions of the company and the management of its finances at the time of the commission of the offences in question (the right of the public prosecutor to prosecute the real perpetrators, usually for instigating the offences, is, of course, preserved). The jurisprudence of the courts in this respect is rich and the criteria taken into account in each case vary. 

Thus, the Commission's Decision No. 100/2019 decision of the Supreme Court annuls an appellate decision which did not take into account the relevant claim of the defendant regarding his formal and only participation in the company in question, convicting him for non-payment of debts due to his apparent and only status of legal representative (according to the assumptions of the "The appellate court slaughtered ... by rejecting the appellant's claim that the subjective element of fraudulent intent was negated by the fact that he was the debtor's legal representative of the debtor only formally, being merely an employee of the debtor and having in fact no connection with its management, without taking into account the five earlier acquittals produced by the defence and acknowledged at the hearing". The Supreme Court's decision No. 1568/2018 on "type" of manager of an S.P.E. also makes an exonerative judgment, accepting the correct judgment of the court of appeal, rejecting an appeal for incorrect reasoning, according to the latter " ..... However, it was not proven beyond reasonable doubt that the accused was actually and not just a mere type of participant in the management of the company, co-managing and representing it, given that the defense witness, who owned an adjacent store, testified that the accused was engaged in his university studies while he had never worked with him except with his father ... the Court also maintains doubts about his intention to delay payment of the confirmed debts". According to Decision No 1747/2010 of the Tribunal of the Court of First Instance, ' ... as it was proved, the accused was only 28 years old, lacked any scientific and technical knowledge of business management, worked only as an office worker, was the daughter-in-law of the above founder of the company, married to the son of S.H.'. .... It was further proved that the first defendant never had access to the company's cash box, was never informed about its debts and liabilities, never represented it, nor exercised managerial rights to the employees, and there is no material deed of the company bearing her signature. It follows from the foregoing that the first defendant has never exercised effective management and must therefore be declared not guilty of acts or omissions towards the Tax Office of Thessaloniki for infringements of Article 20 para. 1 and 6 of Law No. 2523/1997 (tax evasion)'. TrimPlAth 28738/2015 and TrEfLar 1603/2015 also make acquittals with similar reasoning. Finally, of interest are the assumptions of the decision (although administrative) of the TPRATH 8523/2020, according to which "... The active participation in the administration, on the basis of which, moreover, it is judged whether the obligation to withhold and pay the contributions arises, is the criterion for the criminal treatment of the persons responsible for the payment of the contributions, under the provisions of Article 1 of Law No. 86/1967 and the status of legal representative of the company is not sufficient'.

c) Allocation of responsibilities and non-inclusion of the criminal act - omission in the duties of the administrator: There are cases, of course, where the status of representative - managing director may not have been lost by resignation or expiry of the term of office but, due to intra-company allocation, the control of payment of debts and contributions may have been entrusted to a specific person in the company's administrative machinery (see in this respect no. 712/2019 decision of the Supreme Court in a related offence of non-payment of accrued wages, in which the representative - managing director should have been entrusted with the specific responsibility of fulfilling the specific debt in order to incur criminal liability from his failure to fulfill it). 

d) Lack of fraudulent intent: Notwithstanding the formality of these offences, the fraudulence of the persons responsible should also be examined, i.e. whether they had knowledge of the debt in question or of the criminal act or omission in general. Thus, although the status of representative was not lacking, nor was there in fact management by another person, the Athens Trial Court of Appeal 5454/2017 acquitted a general partner due to lack of knowledge of the disputed debts that had not been communicated to him by his partner, also a general partner - co-manager. According to the assumptions of the decision, "The business in its initial corporate form and then as a partnership was based on the relationship of trust that existed between the two partners, of which N.K. was exclusively involved in the technical - construction part, as responsible for the crews of workers and the construction of scaffolding, while K.N. had undertaken and exclusively exercised the financial management of the company. The second defendant was not aware of the debts in question, since the first of them did not inform him and he himself, not having knowledge of accounting and access to the required books, had no other source of knowledge ... Consequently, he should be declared not guilty due to doubts as to fraudulent intent." 

e) Financial impossibility of performance - lack of cash liquidity: The financial inability of debtors is not treated by the courts as a reason for their exemption from the offences under consideration, but as a reason for the recognition of a relevant mitigating circumstance (that of Art. 2b' CCP - the so-called mitigating circumstance of 'non-humiliating causes' that led to the criminal act or omission - see in this respect TrimPlimKalam. 1274/2017). This attitude of the courts is highly problematic as it goes against the general principle according to which "no one can be forced to do the impossible" in cases, of course, of insubstantial failure to comply, but also the basic principle of guilt that governs criminal law. However, a crack in the above is observed with TrimPlimPatr. 999/2017 in which the accused was declared innocent for acts of non-payment of employer and labour contributions due to involuntary inability to do otherwise due to the above-mentioned force, as the freezing of his bank accounts, which he held with a relative who was being prosecuted for money laundering, had been ordered by the Petty Magistrate's Council, and no other way, apart from bank transfer, was possible to make the payment. In this regard, the court accepted the lack of imputation of the accused under Article 32 of the PC.

4. The liability of the vice-chairman of the board of directors of a public limited company in particular:

In the above provisions describing the circle of persons liable for the offences in question, no mention is made of the Vice-Chairmen of the Board of Directors. In the absence of a relevant legislative provision in the case law, the view prevails that the person in question belongs to the second category of liable persons, i.e., he/she must replace the chairmen, managing directors and directors (if the former are missing) and exercise effective representation and management in order to incur criminal liability (see relevant case law 517/2015, 225/2015).

5. Burden of proof in criminal proceedings after the new Code of Criminal Procedure:

We have seen above that the accused for the offences under consideration has several weapons in his "quiver" to defend himself against a possible accusation. Court decisions treat the relevant allegations sometimes as negative of the charge (lack of objective or subjective basis of the offence: i.e. lack of status of representative, certificate, overdue payment, etc. and lack of malice) and sometimes as independent (allegations of mitigating circumstances or lack of objective imputation due to a situation of necessity, etc.). The courts tend to give reasons for rejecting only the second type of allegation (so-called independent allegations), despite the contrary case law of the European Court of Human Rights, which requires that the rejection of any substantial allegation of the accused tending to his or her acquittal must be thoroughly justified, and the constitutional requirements for specific and thorough reasoning in every decision without discrimination. Further, although in practice it is the accused and their counsel who try to prove the truth of the above allegations before the Court (whether independent or negative), it is worth noting the new provision in para. 178 para. 2 provision of the CCP, Art. 4620/2019, which, in compliance with the presumption of innocence of the accused and the principle of ex officio investigation of the criminal offence by the Court, stipulates "Judges and prosecutors shall examine ex officio all evidence that establishes the guilt or testifies to the innocence of the accused as well as any evidence relating to his personality that affects the calculation of the sentence. The accused shall not be obliged to adduce evidence of the facts relied on in his favour. Therefore, by virtue of a now explicit statutory provision, the accused cannot be convicted if he is unable to prove what he claims. The court must examine the relevant allegations of its own motion and apply the rules on the burden of proof correctly, giving reasons for any rejection of a defence (otherwise, relevant grounds of appeal arise which can lead to the reversal of the defective judgment).

6. Instead of an epilogue:

From what has been discussed, it has become clear that in the offences under consideration, which, in many cases, are characterized as "formal" (especially with regard to non-payment of debts and non-payment of insurance contributions) due to the prevailing impression that only the default and the status of the representative - manager are checked for their fulfillment, the accused has a series of defenses in order to be exonerated. The latter may invoke both the lack of the status of the representative, the formal and only involvement of the representative, but also the lack of fraud (especially after the amendment of Art. 4646/2019 and the explicit addition of the precondition of fault for the creation of the relevant civil liability towards the public, let alone criminal liability!!) or imputation on his/her person. The criminal judge, in turn, must examine each substantive allegation of the accused by assessing substantive indications of lack of liability that come even from the field of administrative law (see in this regard no. 1082/2021 decision of the AADE, which defines indicatively the cases of lack of fault for the non-establishment of joint and several liability as well as No. 65118/2021 SA of material indicators of lack of liability of representatives for the payment of insurance contributions) by attributing the relevant responsibility only to the truly responsible parties.