Limitation of liability of partners and the obligations arising from labor relationships

1.     Introduction

One of the significant benefits granted to those setting up or becoming part of a corporation or limited liability company is the limitation of liability to the shares paid up or quotas subscribed to (sections 163 and 143 of the Companies Law - "C.L."). It is for this reason that such corporate forms are attractive and are the most common method of organizing modern businesses. At present there can be no arguing that corporations and limited liability companies are the main business forms currently in use, allowing the separation between the partners wealth from that of the company.

This benefit is offset by certain obligations that the company must fulfil, such as strict observance of formal aspects (preparation of annual financial statements, holding of regular shareholders' and board meetings, etc.), the prohibition on distribution of dividends until previous year's losses have been made good and a reasonable setting up of free reserves.

According to section 54 in fine of the C.L., this limitation of liability can only be set aside when the company is used for extra-corporate purposes and in a manner intended to violate the law, by-laws or regulations, or to frustrate the rights of third parties. In other words, when the purpose is not to exploit the commercial establishment.

2.    Limitation of liability in labor court jurisdiction

Certain cases of the labor courts (1) have made a liberal interpretation of section 54 paragraph 3 of the C.L., extending liability to the partners of the employer company for failure to register employees, on the grounds that it represents a conduct that violates public policy on labor matters.

There is no dispute among legal scholars that corporate personality is no more than a technical resource (2) provided by legislation in order to simplify collective relationships. However, this technical resource must be properly utilized. Otherwise, if it is used abusively or fraudulently against the interests of the partners themselves or third parties, distorting the purposes for which it has been created, it gives rise to the possibility of disregarding the legal personality, attributing the corporate actions to the partners or controlling persons, without implying the nullity of the social contract. Regardless of the liability attributed to the partners of controlling persons, the company would continue in operation.

In other words, the limitation of liability is disregarded when those that benefit from the resource, in specific and verified instances, use it abusively, pursuing extra-corporate ends and as a means to violate the law or defraud third parties.

Nevertheless, it is necessary to make a distinction between the abusive use of corporate structures, and those acts that the company performs through its administrators (section 58) that infringe the law, although without having made use of the technical resource of the company's legal personality to carry out those harmful and illegal acts. In these cases, the application of section 54 paragraph three cannot be claimed, as it can only be invoked when the legal person (company) is used as a means to achieve extra-corporate ends, violation of the law, public policy or good faith or to frustrate the rights of third parties.

Therefore, in cases of infringement of labor law rules such as those that require the registration of employees, we cannot affirm that such a violation inevitably implies that the legal personality have been used as a means to achieve non-corporate ends and violate the law. Even when labor or other laws are violated, there are no extra-corporate ends if there is a corporate establishment and the objective is sharing the profits and bearing the losses. It should be duly proven that the company has been used as an instrument or means to violate the law.

The Supreme Court, in the case "Cingiale María C. and others v. Polledo Agropecuaria S.A. and others (Supreme Court, File C-414.XXXV, 05-05-2002)", although rejecting for formal reasons a certiorari filed by the defendan, included an opinion by two of its members in relation to the application of section 54 of the C.L.

Justices Moliné O'Connor and López stated when voting that the Court of Appeals "had invoked the provisions of section 54 of Law No. 19,550, without analysing if, as required by such section, it was a case of misuse of the corporate personality. In such a context, the conclusion that the illicit acts performed by the company must be attibuted to its partners due to their illegality has not sufficient legal basis." They further stated that "it was also necessary to prove the misuses of the corporate personality for not using it as a legal structure for a business undertaking by the partners (sections 1 and 2 of Law No. 19,550) but rather as a mere instrument to perform acts of such nature and without assuming their consequences."

3.    Conclusion

• Section 54 paragraph three of the C.L. refers to "extra-corporate purposes", which are those where use is made of a legal person (S.A. or S.R.L.) for extra-corporate purposes, understood to be the sharing in the profits and the bearing of losses through exploitation and interchange of goods and services (section 1 C.L.).
• Contrary to the rulings of certain labor courts, only when the company or its performance is used as a means of violating the law, public policy or to frustrate the rights of third parties, can the liability of the partners be claimed.
• The fact that it may be required to penalize certain conducts, such as the failure to register employees (3), unjustified dismissal, etc., cannot justify the disproportionate use of this rule, as in such cases there are no extra-corporate purposes, as the company acts as an enterprise by exploiting or interchanging goods and services, and the actions of the legal person do not constitute a means for violating the law.
• It will not be through the application of this penalty, (section 54 in fine of the C.L.) that proper punishment of such conduct will be achieved, as it would endanger the concept of a corporation as a legal person, exposing it to threats to its existence in the event of any non-compliance.