Update | Does resisting a ‘lost’ case expose a director to liability to creditors?

It happens not infrequently to come across debtors who, in an attempt to delay enforcement actions against themselves, propose all forms of opposition to debt recovery actions. Can this behaviour be a source of liability for the director or liquidator of the debtor company? The Court of Cagliari gave a positive answer to this question.

The case concerns a company Alfa that was in a de facto liquidation situation, with little liquidity on its accounts and negative net assets. In this context, the liquidator, who had just taken office, could and should have become aware of the company’s evident insolvency situation, which, in the face of large debts recorded in the accounts, had disputed receivables from Beta, its main business partner, which in turn held large receivables from Alfa that were not recorded in the balance sheet. In essence, Alfa’s insolvency situation was discernible without any need for a careful examination of the company’s accounts. Faced with the action in arbitration brought by Beta to recover the amount due from Alfa, Alfa’s liquidator decided to defend the company’s position in the arbitration with arguments that were evidently groundless, incurring substantial legal costs for the defence in arbitration. All this without taking steps to liquidate Alfa.

In this context, the Court of Cagliari referred to what has already been clarified by the jurisprudence of legitimacy and merit concerning the fact that also the managerial conduct of the liquidator benefits from the yardstick of the so-called business judgement rule, under which what is subject to review by the judge is not the convenience and/or utility of the act in itself, nor the result that it may have produced, but rather the manner in which the discretionary power vested in the directors was exercised, which, in order to be immune from criticism, must not exceed the limits of reasonableness.

The conduct of Alfa’s liquidator was held to be negligent in two respects: he did not fulfil his obligation to liquidate the company’s assets and he unreasonably resisted the arbitration request proposed by Beta, without any possibility of a victorious outcome. The damages to be paid by the liquidator correspond to that part of the costs incurred by Alfa which, had bankruptcy been declared in time, would not have occurred, including the substantial costs of the arbitration.