The patrimonial imbalance in foundations: a legal problem?

Pursuant to the provisions of the Capital Companies Law, in the event of an asset imbalance, the company's directors are obliged to call a general meeting within two months to adopt a dissolution resolution or the necessary measures to reverse the imbalance. In the event of failure to comply with this obligation, Article 367 of the Capital Companies Law provides that the directors are jointly and severally liable for the corporate obligations subsequent to the occurrence of the cause for dissolution.

As has been recognized by doctrine and jurisprudence, the Capital Companies Law establishes, in this case, a kind of strict or quasi-strict liability for the directors of the companies.

However, this situation is treated differently when the legal entity in a situation of asset imbalance is a foundation. And it is precisely this singularity that we are interested in highlighting in this article.

At the outset, it would be logical to think that the regulations applicable to foundations contemplate a regime analogous to that of the Capital Companies Act. Nothing could be further from the truth. Neither the state regulations nor the Third Book of the Civil Code of Catalonia, relating to legal persons, contemplate any obligation or objective liability when the situation of patrimonial imbalance affects this type of entities.

Thus, article 31 of Law 50/2002 on Foundations and article 335-4 of the Civil Code of Catalonia, which list the causes of extinction and dissolution of foundations, respectively, do not include the patrimonial imbalance in their respective lists of causes. Nor is there any express obligation in the applicable regulations to reverse the situation or to initiate the process of dissolution of the foundation, nor is there any liability associated with the actions of the trustees in this situation.

Having said this, it is worth highlighting Article 22 of the Regulations of foundations of state competence, which establishes the following “when during two consecutive fiscal years a serious reduction of its own funds is detected in the annual accounts of a foundation, which puts at risk the achievement of its purposes, the protectorate may require the board of trustees to adopt the appropriate measures to correct the situation”.

This provision of Article 22 is the closest we can find to the regime of the Capital Companies Law in the regulations applicable to foundations. However, the aforementioned article does not specify the measures to be adopted, nor does it classify the serious reduction of equity as a cause for dissolution and, finally, it does not foresee any liability for the trustees for not having adopted the appropriate measures. Furthermore, it seems that the measures to be adopted must be requested by the protectorate, which also has the power to say nothing.

In the absence of an equivalent regime, the analogical application of the regime of the Capital Companies Law could be considered. However, the High Court of Justice of Catalonia, in its ruling of September 17, 2009, has ruled on this issue, indicating, on the one hand, that there is no identity of reason or legal similarity and, on the other, that there is no legal loophole or regulatory vacuum, thus excluding the possibility of applying to the trustees the liability regime for debts of the administrators of capital companies.

As regards the lack of identity of reason or legal similarity between capital companies and foundations, the aforementioned judgment highlights two distinguishing features between the two types of entities: the pursuit of general interest purposes and the absence of a profit motive. According to the court, these two characteristics of foundations mean that the legal similarity required for analogical application cannot be assessed.

As regards the legal loophole, the court states that “the fact that the liability regime of the trustees of foundations is not the same as that of the managers of capital companies does not mean that their liability is limited to compensation for damages that may have been caused to the foundation as a consequence of their negligent actions, since they may also be held individually liable in criminal (...) or bankruptcy proceedings (...)”. In other words, the court understands that there is no legal loophole, but simply a liability regime applicable to employers that is different from that of company directors. It is pointed out that the regime applicable to the employers is regulated in the legal system as a whole, which articulates a system of civil liability for damages, criminal liability or bankruptcy liability, among others, and which makes the analogical application of the liability regime of the administrators unnecessary.

As pointed out, the asset imbalance in foundations does not generate per se the obligation to adopt measures aimed at reestablishing the situation or dissolving the foundation, nor does it derive objective liability for the trustees. Does this mean that they cannot be held liable? Well, in the case of asset imbalance, it seems that the trustees cannot be held liable, or at least not in the same “direct” way as the administrators of the companies. It would be a different matter if the situation of imbalance were to produce a damage to the foundation or to a third party, in which case, it would be possible to exercise the action of liability in the interest of the foundation on the part of the corresponding legitimate subject.

Having said this, it should be borne in mind that the imbalance of assets can lead to insolvency and that the trustees can be liable from an insolvency perspective. Thus, as legal persons, the Insolvency Act also applies to foundations, which can be declared bankrupt. This means that the insolvency liability regime provided for in the aforementioned Law applies to the trustees. The references to the administrators contained in the Insolvency Law must simply be understood as referring to the trustees. In this sense, the trustees will be liable if the insolvency of the foundation is classified as culpable, that is to say, when in the generation or aggravation of the state of insolvency there has been fraud or gross negligence on the part of the trustees.

All in all, our recommendation is to adopt, in the phase of asset imbalance and without the need to wait for the insolvency phase -especially if this is to be avoided- all the appropriate measures to correct this situation of losses, acting with the diligence of a legal representative or a good administrator that the regulations on foundations presuppose for the position of trustee. All this in order to avoid reaching the state of insolvency of the foundation, which would require filing for bankruptcy.

Although the imbalance in foundations does not require a specific reaction on the part of the board of trustees nor is it associated with a strict liability regime such as that of Article 367 of the Capital Companies Act, the conclusion that can be drawn from this case is that it is advisable for the trustees to act diligently, bearing in mind that they may be liable for damages caused to the foundation, vis-à-vis third parties, and that they may also be liable in insolvency proceedings. Thus, despite the fact that the regulations, more or less correctly, do not envisage tying up the trustees, it is advisable to anticipate events and react in time to a situation of losses.