Rule of the Corporate Insolvency and Recovery Code (CIRE) under which, when a court sentence includes a finding of the culpable insolvency of a commercial company, the court must also order the disqualification of the latter’s directors.
Board of directors
RULING Nº 173/2009
2 of April of 2009
The Corporate Insolvency and Recovery Code (CIRE) rule under which, when a court sentence includes a finding of the culpable insolvency of a commercial company, the court must also order the disqualification of the latter’s directors is unconstitutional. This is because, in principle, under the Constitution the justification for measures that restrict a person’s civil capacity is the need to protect that person, whom natural reasons have rendered incapable.
Even if one were to accept that it is constitutionally legitimate to see disqualification as a multipurpose instrument designed to prevent culpable forms of behaviour that might undermine legal security, in constitutional terms it is imperative that restrictions on civil capacity be limited to those needed to safeguard other constitutionally protected rights or interests, and the obligatory disqualification in question does not respect the principle of proportionality.
The Constitution says that if any of its own Justices or the Public Prosecutors’ Office (PPO) so requests, the Constitutional Court must consider whether any rule that it has already found unconstitutional or illegal in three concrete cases is indeed unconstitutional or illegal. This constitutes a new review process in its own right, and leads to a new decision. If the Court again finds the rule unconstitutional or illegal, it must then declare it so with generally binding force.
In the present case the PPO representative at the Constitutional Court asked the Court to consider the CIRE rule under which, when a court sentence includes a finding of the culpable insolvency of a commercial company, the court must also order the disqualification of the latter’s directors.
This rule had already been held unconstitutional in more than three concrete cases, and the PPO representative therefore asked the Court to declare it unconstitutional with generally binding force.
In Ruling no. 173-09 the Court summarised the grounds for a number of earlier decisions, and then looked at the issue anew. It noted that under the Constitution, civil capacity must be recognised on the basis of legal personality and embraces both the capacity to enjoy rights and the capacity to exercise them or to act.
In constitutional terms deprivation of citizenship and restrictions on civil capacity can only be imposed in the cases and under the conditions laid down by law. While there is a sliding scale for both the capacity to enjoy, and the capacity to exercise, rights, in the case of adult legal subjects deprivation or restriction of such rights is an exceptional measure which, at least to begin with, can only be justified by the need to protect the incapacitated person’s own legal personality.
In particular, such a restriction cannot serve as a punishment, or be the effect of a punishment.
When it comes to the CIRE rule that was before the Court in this case, the disqualification was not the result of a situation involving a person’s natural incapacity, which rendered him inapt to autonomously manage his property, but an objective state involving an impossibility to fulfil past-due obligations that can be attributed to a culpable behaviour (qualified guilt) on the part of the debtor or its directors. However, the latter form of behaviour is not in itself indicative of any incapacitating personal characteristic.
Moreover, if one were to consider that the object of the protection was the person affected by the disqualification measure, it would not be comprehensible for its subjective scope to be limited to the directors who least deserved that protection, given that they were accused of a highly reprehensible conduct as managers, while directors who acted without blame or with only a slight degree of culpability were excluded.
If this were to be the grounds for the disqualification, one would also have to explain why the general preconditions for the measure are not those laid down by the Civil Code. In the present case, the imposition of a measure that restricts capacity is a necessary accessory effect of a situation of culpable insolvency, with no need to resort to the applicable procedural means to prove a lack of natural capacity.
Nor is this a case of defending the creditors’ interests, inasmuch as the disqualification does nothing to help achieve the goal of the insolvency process. The latter includes a suitable mechanism for this purpose, which seeks to preserve any property with a lien on it by transferring the directors’ powers to the administrator of the insolvency process and deciding the fate of the insolvent company’s assets.
The scope of the disqualification provided for by this rule can only be a punitive one, which is reflected in a real punishment for the illegal, culpable behaviour of the person or persons who is/are disqualified.
Symptomatically, the duration of the measure can be anywhere between a minimum and a maximum – a feature of criminal penalties. Nor do the criteria for determining its exact length greatly differ from those used in the criminal field (particularly as regards the degree of blame and the seriousness of the damaging consequences).
If one accepts the constitutional legitimacy of placing restrictions on civil capacity for reasons other than the protection of the subject who is the object of the measure, then it is necessary to determine whether the disqualification serves any other interests – particularly the defence of the general interests of legal commerce. We can see that the measure does not safeguard the position of any future creditors of the disqualified person, given that under the rules on disqualification, they would not possess the legitimacy to argue the invalidity of any acts that the disqualified person were to undertake without the trustee’s consent.
This leaves the question of whether this measure of a sanctionary nature is supported by reasons related to the need to prevent forms of behaviour that are culpably damaging to the security of legal commerce in general.
However, the latter goal continues to be served by the measure that entails the prohibition of engaging in commerce and of acting as a director or officer of a commercial or civil body corporate, association or private foundation engaging in economic activities, or state-owned or cooperative company – a sanction that is applied in addition to, and not instead of, disqualification.
Bearing in mind the obligatory nature of the disqualification order – a measure that could only be justified in the light of these general interests and the universe affected by it – it is possible to conclude that the more serious sanction of disqualification is not indispensable to the safeguarding of those interests. As such, the measure is in breach of the criterion of necessity or requirability stipulated by the principle of proportionality.
Even if one were to argue that disqualification is more effective in preventive terms, one would always have to say that the combination and simultaneous imposition of both restrictions would injure the principle of the prohibition of excess.
So, whatever perspective one takes as to the purpose of the rule in question and the teleology of disqualification as a whole, the CIRE rule violates the principle of proportionality.
The Court thus declared with generally binding force that the Corporate Insolvency and Recovery Code rule under which, when a court sentence includes a finding of the culpable insolvency of a commercial company, the court must also order the disqualification of the latter’s directors, is unconstitutional.
A number of opinions are attached to this Ruling. The first is that of the rapporteur, who emphasised that the object of the finding of unconstitutionality was just one aspect of the CIRE rule, as required by the principle that the Court’s decision can only address the issues raised in the application or appeal. He did say, however, that the PPO’s application could have been more wide-ranging and have covered both the debtor and all its legally appointed or de facto directors, inasmuch as the PPO already had enough Court decisions at its disposal to make it so. The rapporteur considered that the Constitution requires the purpose of a measure which restricts civil capacity – even the capacity to engage in business dealings – to be that of protecting the incapacitated person, and that this was not the teleology of the rule before the Court.
The second opinion concurs with the decision, but differs as to the grounds for it. Its author felt that in the absence of any statement by the director of the company that had been declared insolvent that he was not apt to manage the latter’s assets in an appropriate manner, the imposition of the disqualification measure – which limits his legal capacity – was not proportionate, and is thus unacceptable under the article of the Constitution governing restrictions on constitutional Rights, Freedoms and Guarantees.
Finally, there was also a dissenting opinion. Its author argued that incapacitation is only a restriction on the fundamental right to civil capacity, which, because it is a restriction on a fundamental right, must comply with the requirements laid down by the Constitution – namely the principle of proportionality; but at the same time it is not a legal instrument that serves solely to protect the interests of the incapacitated person. The dissenting Justice felt that the option adopted by the ordinary legislative authorities cannot be criticised, in that one must recognise that the latter possess a prerogative that enables them to gauge permissible restrictions on the fundamental right to civil capacity.