Joint and Several Liability of Directors of Legal Entities for the Payment of Social Security Contributions

legal insight

July 2023

Konstantina Daskalopoulou, LL.M.

Summary: In a previous note, we addressed the issue of the criminal treatment of the managers of legal entities vis-à-vis the State and the Social Security Organizations for non-payment of tax and social security debts, respectively, owed by the legal entity. In this note, we examine the parameters of the joint and several liability of the directors themselves for the payment of social security contributions payable, in principle, by the legal person, that is to say, the conditions under which those persons are required to cover, with their personal assets, the debts of the legal person towards the social security institutions.

1. Introduction:

In the field of payment of insurance contributions, the person liable for payment is the employer, i.e. the natural or legal person on whose behalf the work is performed on behalf of the insured person. Thus, where the employer is a public limited company, the obligation to pay the relevant contributions is borne by the company itself and not by its shareholders or persons exercising management functions. 

A prerequisite for making the natural person who manages a limited company liable for the payment of the contributions payable by it is the adoption of a specific provision establishing what is known as 'joint and several liability', that is to say, the obligation to pay the contributions concerned out of his own personal assets. In this context, the legislature has expressly provided, in the provision of Article 31 of Law No. 4321/2015, the liability of the governors of legal entities for the payment of the insurance contributions, additional fees, surcharges and other charges owed by these legal entities and legal entities to the Social Security Institutions. This regulation aimed at harmonising the joint and several liability towards social security institutions with the joint liability of the administrators towards the tax administration, which was first established by Law No. 2238/1994, the provisions of which were applied by analogy to the insurance contributions due to the I.K.A.-ETAM, initially at the time of dissolution or merger, and subsequently also during the operation of legal persons.

In the case of both tax and insurance contributions, the reason for establishing the parallel liability of natural persons managing limited liability companies is that their duties include ensuring that the company complies with its obligations to the tax authority and the insurance institutions, respectively. Thus, their liability is based on their failure to perform their duties to the extent that the company ends up neglecting to fulfil its obligations. In this context, the introduction of the liability of the director of the legal person is a mechanism for compelling the latter to comply with his obligations so that they are not borne by the director of the legal person, thereby threatening his personal property. According to case law, ensuring the collection of the contributions due to the funds is an objective of public interest (CoE 1028/2013) and, in some respects, also contributes to the realisation of the institution of social security. 

2. Conditions for establishing liability: 

The provision of Art. The provisions of Article 31 of Law 4321/2015, as in force after its amendment by Article 64 of Law 4321/2015. Article 31 of article 43212121, as amended by Article 64 of the Law of the Republic of Serbia, as amended by Article 64 of Law 43212121, establishes the joint and several liability of the legal representatives, presidents, managers, directors, managing directors, administrators and liquidators of legal persons and legal entities at the time of their dissolution or merger, for the payment of the social security contributions, additional charges, surcharges and other charges due from such legal persons and legal entities to the Social Security Institutions, irrespective of the time at which they were established. By amending Article 64 of Law No. 4646/2019, the liability of the above mentioned persons was related, on the one hand, to the expiry of the deadline for the payment of social security contributions and, on the other hand, to the existence or not of fault on their part. In particular, the above persons are liable, subject to the following conditions:

(A) the persons referred to above, in a restrictive manner, had one of the abovementioned qualities either during the operation of the legal person or at the time of its dissolution, winding-up, dissolution or merger or during the winding-up of the legal person: The above-mentioned qualities refer to persons who, by the articles of association and the resolutions of the General Meeting and the Board of Directors, have individual authority to manage and represent the company, whether or not they are members of the Board of Directors. The persons liable do not include deputies, even if such persons may have exercised management or been involved in the management of the company's affairs, nor do they include the vice-presidents of the company. In this context, it is not examined who actually exercises the administration and management of the company, contrary to the provisions in force in the field of criminal liability of managers, so that if all the specified persons are missing, the perpetrators are considered to be members of the boards of directors of these companies, provided that they actually exercise one of the management functions temporarily or permanently (Article 25 of Law 4075/2012). As a result, a person may have been criminally convicted for non-payment of contributions due from the company, but may not be jointly and severally liable under Art. 31 of Law No. 4321/2015.

It has also been held that the provisions on joint and several liability are, by their very nature, narrowly interpreted and, consequently, do not apply in the case of interim management appointed by a court decision under Article 69 of the Civil Code (CoE 1183-1187/2018; CfAth 1026/2021).

B) the debts became due during their term of office in one of the above-mentioned capacities: under this condition, the liability is limited to the duration of the term of office of the persons legally co-responsible, excluding debts whose payment deadlines expired prior to their assumption of office. Consequently, from the date of entry into force of the new provision, i.e. from 12.12.2019, the co-obligated persons are personally and jointly and severally liable with the legal person they manage, only for the insurance contributions whose due date expired within their term of office in that capacity. In practice, therefore, the Managing Director of a limited liability company with a term of office from 15.10.2020 to 16.9.2023 is liable only for the debts with an insurance period from 9.2020 to 7.2023, because the payment deadline for 9.2020 expired on 30.10.2020, i.e. within his term of office, as well as the payment deadline for 7.2023, which expired on 31.8.2023. He will not be liable for the 8th.2023, because n payment deadline expires after his term of office, on 30.9.2023. As a consequence, the liability of the administrators now includes acts of confirmation of debt relating to insurance periods which begin within the month preceding the month in which their term of office begins and end within the month preceding the month in which their term of office ends (EFKA Circular 9/2020).

For debts that have been subject to regulation, the joint and several liability shall be borne by the co-obligated persons, provided that the relevant conditions were fulfilled at the time when each instalment of the regulation became due or the regulation lapsed. Furthermore, if the debts were established after an audit, the persons to whom the relevant conditions existed during the year or period to which the debts relate shall be jointly and severally liable. 

C) the debts in question have not been paid or repaid to the State through the fault of the aforementioned persons: the burden of proving the absence of fault lies with the persons alleged to be co-responsible on the basis of their aforementioned qualities. As stated in the 9/2020 Circular of the EFKA: 'this allegation shall not be examined in the context of the administrative procedure, nor shall the relevant issues be resolved out of court. On the contrary, the allegation of non-fault will have to be proved by the persons concerned within the framework of the legal remedy of an appeal against the cash settlement of debts or any enforcement action'. 

In this regard, by Decision No 65118/6.9.2021 of the Deputy Minister of Labour and Social Affairs, certain cases of lack of fault, which entail the non-establishment of joint and several liability, were regulated in a manner similar to the regulation of Decision No A.1082/7-4-2021 of the Deputy Minister of Finance, which lists cases of lack of fault in the context of joint and several liability for the payment of tax debts. Among them, the following are included:

1) Prolonged inability to perform administrative duties due to serious illness, as well as lack of legal capacity at the time in question.

2) Exclusive delegation of specific management and representation tasks which do not relate to the insurance obligations of the legal person, where the persons concerned do not have the exclusive general power of representation and management of the legal person, according to published documents.

3) The existence of an irrevocable acquittal decision of a criminal court or an irrevocable acquittal judgment or a final decision of a court on the basis of which it is expressly established that there is no fault.

4) Resignation prior to the relevant period or proven non-acceptance of the appointment.

5) Lack of actual involvement in the administration/management of the affairs of the legal person, even though the person has one of the critical qualities: for this case, elements such as lack of remuneration to this person, lack of shareholding or partnership relationship with the legal person or legal entity, lack of banking transactions, lack of management of corporate bank accounts, lack of signature of minutes of the Board of Directors or financial statements, together with evidence of

In this context, it has been held that the status of chairman alone is not sufficient if it is not accompanied by powers of management and representation of the company, but these powers have been delegated to another or other persons (IRC 4150/18). In the same context, in the case of the decision of the Court of Justice of the European Communities in Case No. 2396/2023, the Administrative Court of First Instance of Thessaloniki held that the requirement of fault was not met, taking into account, inter alia, the lack of a specimen signature in the records of a banking institution with which the legal person of the alleged co-manager of a private limited company was cooperating. According to the operative part of the judgment: 'In those circumstances, the Court takes into account, first of all, that [...] the manager of a private limited company is relieved of his joint and several liability for the insurance debts of the latter, since he had no real involvement in the management of its affairs, which is demonstrated by taking account of relevant facts and parameters. Indicatively, the following are taken into account in this respect: the lack of participation in the corporate capital of the (natural) person in question, the lack of provision and payment of remuneration to that person, the restriction of his responsibilities or his exclusion from the most basic corporate responsibilities (administration and management), the lack of his signature under the corporate name on corporate documents, the lack of knowledge of the details of his signature by banks serving or transacting with the company or the lack of documents of decisions or acts on behalf of the company taken by him and bearing his signature, as stated above, any testimonies to this effect from persons related to the company's activity (employees, accountants, external partners, etc.) a.) [...] In this case, as is clear from the articles of association of the above mentioned I.K.E., [...] the applicant: (a) he did not hold a partnership interest in the said company; (b) he was appointed as its manager for a period of less than three (3) months; (c) no remuneration was provided for in the articles of association of the said company for the management entrusted to him, in accordance with the provisions set out in the main recital; and (d) he had no authority to manage and represent the company for transactions exceeding EUR 250 and, ultimately, for almost all of the essential company matters, which required the co-signature of the partner [...]. ] In other words, any assignment (only) to him of the power of management and representation was not only a formality, but also a rhetorical trick, since the subsequent text of the articles of association essentially revoked the original assignment to him of corporate management and representation on the basis of the same text, which included an explicit condition of co-signature of the above-mentioned main (almost exclusive, as stated above) partner [... ] for essentially every matter that serves the company's purpose, i.e. not only for transactions above EUR 250 but for everything in practice. From the foregoing evidence, in conjunction with the documents produced by the applicant (private agreements, electronic correspondence), in which the above-mentioned partner appears and allegedly acts as the representative of the company in question, it can be concluded that the company was in fact managed by the above-mentioned partner and not by the partner formally designated as the applicant's manager'. 

3. Termination of joint and several liability: 

Upon termination of a person's management of the legal person, the person's joint and several liability for debts arising from outstanding contributions, which arose at a time subsequent to the termination, also ceases. As was held by the Plenary Session of the Council of State in Case No. 674/2021, upon the resignation of the co-responsible person, the assumption of the duties of the new management is not a prerequisite for the termination of his joint and several liability. According to the decisive considerations of the judgment: 'It follows from this that the aforementioned persons remain liable for the debts of the company incurred before the time of their resignation, but they are not liable for debts incurred at a time later than their legally proven resignation (cf. CoE 3936/1999 7m.). This is irrespective, in principle, of whether a new management of the company has taken office, since such a condition is not provided for in the above-mentioned exceptional provisions of Law No. 2238/1994, and the contrary version would entail, in accordance with what has been accepted in the preceding paragraph, the indefinite and unforeseeable extension of the liability of the persons in question for debts of the company arising from actions over which they could not exert any influence, in violation of the principles of legal certainty and proportionality'. In all other respects, the person shall continue to be liable for debts incurred prior to the termination of his/her liability as described above.

4. Conclusion: 

The introduction of the liability of the directors for the payment of insurance contributions, alongside the liability of the legal person, is undoubtedly a "thorn" in the activity of the natural persons who have assumed the management and representation of the legal person. It is recalled in this regard that the provision of § 2 of Art. 4321/2015, which established the same liability for shareholders or partners of capital companies with a shareholding of at least 10% at the time of dissolution of a legal entity, as well as for the payment of the relevant debts created during the period of the shareholder's or partner's membership, was strongly criticized and has since been abolished. Already today, the correlation of liability with the expiry of the deadline for payment of insurance contributions and with the existence or otherwise of fault, introduced by the amendments to Law No. 4646/2019, has resulted in a clearer delineation of the conditions of joint and several liability, forming a more favourable regime for the persons involved.