Resignation of the Director of the Company and Issues of Discharge from Liability for Public Debts

legal insight    

December 2023

Eleanna Karanikola, Lawyer

Summary: In a previous note, we examined the parameters of the joint and several liability of the directors of legal entities themselves for the payment of insurance contributions that are in principle, borne by the legal entity, analyzing the conditions that must be cumulatively met for the liability of the natural person to arise. In this note, we will proceed with our analysis by presenting the precise steps that it is recommended that the respective director of a legal person should follow in order to discharge himself from the joint and several liability that he bears, by virtue of this capacity, for the debts of the legal person to the tax administration.

1. Introduction

Article 50 of Law No. 4174/2013, i.e. the Code of Tax Procedure (Code of Tax Procedure), as amended by Article 34 of Law No. 4646/2019, establishes the joint and several liability of natural persons managing legal persons and legal entities for tax debts of the latter to the State. This liability is personal and joint and several with the legal entity, i.e., the directors are liable with their individual property and, at the same time, are obliged to pay the full amount due to the State, thus creating a lever of pressure on them to diligently fulfil their obligations in the context of the administration and management of the company. 

The subjective scope of the provision covers persons who are executive chairmen, directors, general managers, managers, managing directors, managing directors, persons appointed to the administration and liquidators of legal persons and legal entities (ex officio liability), as well as persons who defacto exercise the management or administration of a legal person or legal entity. Furthermore, the objective scope of the provision includes debts relating to the payment of income tax, withholding tax, any imposed tax, VAT, owed by these legal persons, regardless of the time of their assessment, as well as interest, fines, surcharges and any administrative financial penalties imposed on them.

However, in order to establish the joint and several liability of the above persons, the following conditions must be met cumulatively: 

a) the persons managing the legal person must have had one of the above capacities, either during the operation of the legal person, or at the time of its dissolution, winding-up, liquidation or merger, or during its liquidation

b) The debts or instalments of instalment payments of debts became due during their term of office under one of the above capacities, subject to the following subparagraphs. If the debts are established following an audit, only persons who were jointly and severally liable within the meaning of this paragraph shall be deemed to be jointly and severally liable within the meaning of this paragraph if the conditions set out in points (a) and (c) were met during the tax year or period to which the debts relate. Where the tax debts referred to in this paragraph have been subject to a regulation, joint and several liability shall also apply to the persons to whom the conditions referred to in points (a) and (c) applied at the time when each instalment of the regulation became due or the regulation lapsed. For the amounts of interest, surcharges, fines and other financial penalties, joint and several liability shall be borne by the persons who are jointly and severally liable for the principal debt on which such amounts are calculated and imposed.

c) The debts in question were not paid or not paid to the State through the fault of the above persons. 

What happens, however, in the case in which the director of the company wishes to resign from his position in the legal entity and how, ultimately, will this affect his liability to the tax administration? 

2. Cessation of joint and several liability of the company director due to resignation:

As we have already stated, the joint and several liability of the company director is created upon his or her acquisition of such status, and is maintained as long as he or she continues, at the relevant time, to legally manage and represent the legal entity. Consequently, given the interdependent relationship between the status of director and the joint and several liability which follows it, if the director resigns or is in any way lawfully removed from office, his liability for debts arising after the date on which he ceases to hold office is extinguished. 

However, it should be considered whether, in this particular case, the waiver of joint and several liability takes effect from the time of his legal resignation or whether the commercial disclosure formalities required for the company form in question must first be complied with. More specifically, the act of resignation of the person managing the legal entity is specified to be published on the website of the General Commercial Registry, in accordance with the provisions of Articles 12 par. 1 c' and 13 of Law no. 4548/2018 for Societe Anonyme and Article 63 of Law No. 4072/2012 for private limited companies. Of course, it is worth noting that the publication of the act of resignation has a declaratory character and not a constitutive one, so this change in the management of the company brings about its legal effects from the point in time when the decision was taken and not from the date of its publication. Consequently, if the formalities of publication are not complied with and the resignation is not published, its validity is fully preserved, but as a result, this resulting change cannot be opposed by third parties unless it is proved that they were aware of it. The decisive question in the present case is whether the State falls within the category of 'third party' and, consequently, whether the cessation of the joint and several liability of the person managing the legal person takes effect from the time of the submission of his valid resignation or from compliance with the formalities for publication of the change in question.

It was accepted in case law that, if the form of publicity of the termination due to resignation was not observed, the managing legal persons could not claim against the State their resignation from the position of management, unless they proved that the Greek State was aware of the change in management. However, in recent years, a part of the jurisprudence has been in favour of the opposite interpretation, holding that if the legal representative and manager of the legal person has validly resigned, he is not liable for taxes incurred after his resignation, even if his resignation act has not received the required publicity, as the State cannot be considered a "third party" when it exercises sovereign administration by imposing taxes and collection measures. Therefore, given the importance of the issue and because of the contrary judicial decisions, the matter was referred to the Plenary of the Council of State, in the context of the decision of the same court, No. 1296/2019.

The aforementioned issue was therefore decided by the Plenary of the Council of State in its decision No. 1366/2021, which reads as follows: "[...] the data of public limited companies for which the law imposes publicity formalities are recorded in the tax register as they result from the respective entries and publications of the commercial register (the Register of Public Limited Companies, at the time in question, and already the General Register of Public Limited Companies), and such data are also those concerning the identity of their legal representatives. Thus, for the removal from the tax register of a public limited company (or any other legal entity whose details are entered in that register) of a person who has lost the status of chairman of the board of directors or managing director (and, in general, the status of legal representative of the legal entity) as a result of a resignation, resignation, termination or resignation, the above-mentioned legal formalities of commercial publicity (registration in the register of public limited companies and publication in the Government Gazette). This is because, as has been consistently held, these formalities are of a declaratory nature and not of a constituent nature, with the result that the failure to comply with these formalities does not, as such, affect the validity of the resignation, which, if legally proven, is valid regardless of its publication, but the company, as expressly provided in paragraph 1.1. 13 of Article 7b of Law No. 2190/1920, the company may not in principle object to the resulting change to third parties, unless it claims and proves that they were aware of it. [...] Such third parties include the State, since it has all the above characteristics, and its legal relations with the company include those arising from tax legislation, including the provisions on tax registration set out in the previous paragraph (and the provisions establishing the joint and several liability of directors for the payment of corporate debts)'. 

As is evident from the above extremely important decision, it was accepted that, in order for the joint and several liability of the legal representative to cease due to resignation, the publicity formalities must be complied with, i.e. the act of resignation must be published in the General Commercial Registry or an act of formation of a new Board of Directors must be published, from which the termination of the duties of the former manager of the legal person will be apparent. However, on a practical level, compliance may prove to be an obstacle, as the company's Board of Directors may fail to reconstitute the company, or else fail to ensure the publication of the act of resignation, with the result that the natural person risks being liable for the company's tax debts incurred after the removal of the natural person from the management and representation of the limited liability company. 

In this case, the resigning director will have to prove that he or she has exercised "due diligence" to cause the publications required by law (or at least that he or she recklessly ignored the non-publication of the resignation. In this regard, it was held in Counsil of State Plenary No. 1366/2021 that: "Therefore, the law does not preclude the initiation of the publication procedure with the diligence of any interested party, and in particular of the natural persons managing the company, to whom, moreover, precisely because of this status, it is known and easy to comply with the relevant legal wording. [...] those latter persons are also required to exercise due diligence and to carry out themselves the due diligence referred to in Article 7b(b)(1) of the Directive. 14 of Law No. 2190/1920, to notify the competent authority of their resignation, at the same time submitting the information showing that they have validly and reasonably resigned, in order to be released, for the time being, from their joint and several guarantee liability towards their creditors (and the State). [...] In addition to the resignation, they must also prove that they have exercised due diligence in order to obtain the publication required by law (or even that they have been recklessly ignorant of the non-publication of the resignation). Only if they have shown such diligence is the tax authority obliged to investigate the substance of the matter in the exercise of its supervisory powers in order to determine whether the applicant's waiver is indeed valid'. 

A similar judgment is reached in the decision of the Council of State (Second Chamber, Plenary), No 1504/2022, which includes the following: "Because what the applicant relied on and produced, arising from the evidence in the file and referred to above, and in the contested act itself, apart from being sufficient to prove the existence and validity of his resignation of 2.2.2002, furthermore proved in principle that he had exercised due diligence to cause the publications of the said resignation as required by law. The tax authority was therefore obliged to investigate the substance of the matter in the exercise of its supervisory powers in order to determine whether the applicant's resignation was in fact valid and, if so, to 'erase' him from the tax register from the moment he resigned, in the sense of entering the finding made in the register'.

In conclusion, in order to be released, the liable individual must, in the first instance, serve the Board of Directors of the legal entity with his duly executed resignation from his position as Chairman, Managing Director, Director of the Board of Directors or any other position he holds in the management of the legal entity that brings about the said liability and, thereafter, ensure that the formalities of publicity of his resignation are complied with. In particular, if the Board of Directors of the legal person, either due to refusal or negligence, fails to take the appropriate action, the resigning natural person (or his authorised representative) must contact the competent department of the General Commercial Registry and initiate of his own accord the procedure for the publication of his resignation. In particular, he/she should go to the General Commercial Registry service and submit his/her resignation statement, as well as the report of its delivery to the other members of the Board of Directors of the legal person, requesting that his/her resignation be published on the General Commercial Registry website. It should be noted that the resigning member may communicate his/her resignation from the position he/she holds in the legal entity to the remaining members of the Board of Directors even by e-mail, which must show that the members of the Board of Directors of the company have received his/her resignation. In practice, the competent department of the General Commercial Registry takes it for granted that the above mentioned persons were duly informed, if the message containing his resignation was sent to the corporate e-mail addresses of the company's board members. In this case, the resigning member must also take the other actions mentioned above, i.e. submit a relevant application to the General Commercial Registry requesting the publication of his resignation, presenting the e-mail message by which he notified the Board of Directors of the legal person of his resignation. In addition, it is also proposed, as a safety valve, that his resignation statement be served to the competent Tax Authority and E.F.K.A. in order for the State and the Insurance Institution to be aware of this change and, consequently, of the cessation of the joint and several liability of the former legal representative. 

3. The assumption of office by the new Board of Directors as a condition for the cessation of joint and several liability:

In the application of the law on joint and several liability, a strong concern has arisen as to whether the appointment of a new management is required as an additional condition in order to bring about the cessation of liability of the company's director who has resigned from office. It is settled case-law that the liability of the resigned legal representative ceases only when the new board of directors of the legal person is constituted, as this avoids the risk of the latter evading his liability to the State at critical moments for the legal person. Moreover, in this way it is possible to ensure that there is at least one natural person who is continuously liable for the legal person's tax debts. 

However, with the decision of the Council of State's seven-member composition, No. 1213/2019, it was held that the cessation of the joint and several liability of the legal representative occurs regardless of the point in time when the new administration takes office, thus adopting an interpretation more consistent with the letter of the law. In particular, the appointment of a new administration is not laid down as a condition for the cessation of joint and several liability in an express formal provision of law, so that such an extension is contrary to the principles of proportionality and legal certainty. Otherwise, the natural person who has legally resigned risks being liable for tax debts arising from management operations in which he was not involved, and in particular for an indefinite period of time, since it is not possible to predict the time between his resignation and the formation of the new board of directors.

The above issue was referred to the Plenary Session of the Council of State, which, in its decision No. 674/2021, held that the assumption of the duties of the new management is not a prerequisite for the cessation of the joint and several liability of the natural person, as follows from the following passage: "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 the time of their resignation duly proved (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'. 

4. In lieu of an epilogue

In conclusion, the cessation of the joint and several liability of the person managing the legal person occurs as a legal consequence of his valid resignation from the representation and legal management of the legal person, provided that the publicity formalities are complied with, that is to say, from the time of publication of the act of resignation in the General Commercial Registry. Therefore, if the resigning director has made the publication of his resignation, otherwise, if he has done everything in his own right to cause the publication of his resignation in accordance with the commercial publicity provisions in force at the time, then, he shall be deemed to have fulfilled his obligation to show 'due diligence' in this respect and shall not be held liable for the tax debts of the legal person incurred after his resignation, without the point in time of the appointment of the new management of the legal person having any influence. However, it is stressed that his joint and several liability with the legal person for those tax debts which became due during his term of office remains unchanged, provided that he is responsible for their non-payment.