Liabilities of Directors – Spanish Law

1. Liabilities in different areas

1.1. Corporate-civil liability

1. The liability of directors in the corporate context is regulated by the Spanish Corporate Enterprises Act (from now on “LSC”).

2. The LSC acknowledges different duties that any director must respect, regardless of the form adopted by the governing body to which company’s governance has been entrusted.

3. The breach of the duties of the Directors regulated in the LSC results in the liability of directors, which may be demanded by (i) the shareholders, and (ii) the corporate creditors.

4. Directors’ liability is generally a liability for fault or negligence, which means that the actions of the directors must cause damage to the corporate assets, shareholders or to the creditors.

5. Nevertheless, there is a case of objective liability of company directors that leads them to answer before creditors for company debts, which is the case of article 363 LSC, that is to say, the liability for not having dissolved and liquidated the company when it was legally obliged to do so.

1.1.1. Liability for breach of director’s duties

6. The first duty that the LSC states is a generic one referring to due diligence (art. 225 LSC). By this, the Spanish law obliges directors to perform their role with the diligence of an ‘orderly business person’. This concept constitutes a behavioral pattern that can be required to directors, as it is a real source of liability that enables interested parties to expect from directors to act as if they were real owners of the business.

7. Therefore, in practice, this concept is translated into directors’ duty to fulfill their tasks in accordance with the laws and by-laws, the right –although also duty—to demand and seek from the company the appropriate information necessary for them to complete their obligations, and the duty to possess the appropriate dedication and adopt the necessary measures for assuring the good management and control of the company.

8. In other words, 1) directors shall fulfill the functions that the law recognizes them, for example, drafting reports, annual accounts, convoking general meetings, etc., 2) supervise the most relevant management decisions of the Company, 3) demand all the necessary information for assessing Company’s decisions.

9. As already mentioned, the duty of due diligence is configured in Spain as a pattern of adequate behavior and does not entail any obligation of result. In fact, the LSC has introduced in its latest reform a rule designed to protect business discretion (the “judgement business rule” of common law) so that directors are protected if they act in accordance with the aforementioned standards of diligence, even if the results of the business are ultimately negative ones.

10. According to these standards, liability in Spain for breach of the duty of due diligence is quite limited and is circumscribed to very blatant cases of breach of such duty, for example, failure to take advice in decision making, acting in a manner totally contrary to such advice, breach of the law and the bylaws.

11. On the other hand, the LSC recognizes one last generic duty whose performance has very much to do with the principle of good faith; the duty of loyalty (art. 227 LSC). I

12. In a cursory way, it could be said that the present duty orders every director to always act in the best interest of the company, i.e. the Spanish legislator expects from directors to process the same fidelity as a representative who acts in fidelity to whom he represents. As a result, they are bound to exercise their powers for the solely purpose for which they were granted, to a duty of confidentiality, to fulfill their roles under the principal of personal responsibility, with freedom of opinion and judgement and independence with respect to third party instructions, and they are also bound to avoid situations in which conflicts of interest may arise.

13. Directors’ duty to avoid conflicts of interests is further developed by the Spanish law. Just to mention some of the circumstances in which this conflict of interest may arise, the law refers to directors’ inability to take advantage of the company’s business opportunities, to use company’s assets for private ends or to invoke their position as directors to unduly influence the completion of private transactions.

14. Regarding, director’s system of liability, The Spanish legal order holds directors personally liable with all their personal assets for any damage caused by their acts or omissions contrary to the law or the by-laws, or for having failed to complete any duties inherent to their roles, anytime there has been misconduct or negligence (art. 236 LSC).
Such a liability has two dimensions:

a) Ad intra: the type of responsibility that makes Directors answer before the Company
and its shareholders (art. 238 LSC) –corporate action—. Such corporate action can be
subsidiarily exercised by creditors as well when not brought by the company or its
partners or shareholders if the company has insufficient assets to repay its liabilities.

b) Ad extra: whenever Directors must answer for harms directly caused to shareholders
or/and creditors individually (art. 241 LSC) –individual action—.

1.1.2. Directors’ liability for corporate debts

15. Under LSC, there are some scenarios in which Corporate Companies are obliged to call for dissolution.

16. In that sense, whenever those scenarios are materialized, it is upon directors’ duties to convene a mandatory general meeting within two months to adopt the decision of dissolution or, they might also institute insolvency proceedings within two months of the date scheduled for the meeting, if not held, or from the day of the meeting. It is when directors fail to fulfill these obligations that are considered to be jointly and severally accountable, together with the company, for corporate obligations incurred after the legal cause for dissolution is forthcoming (art. 367 LSC) –joint liability of directors—.

17. Therefore, contrary to what happens in the previous liability (corporate actions and individual action), this liability does not require any harm, but solely the failure to dissolve the company or institute bankruptcy proceedings.

18. Consequently, directors’ liability for corporate debts is one of the greatest liabilities for corporate directors and one that deserves the most attention given the risks it entails.

1.2. Directors’ liability in bankruptcy proceedings

19. At the same time, within corporate liability there is a special liability that has very much to do with bankruptcy scenarios.

20. In case of insolvency, directors are obliged to file for insolvency proceedings within two months from the time they become aware of the Company’s insolvency.

21. Within the framework of the insolvency proceedings, one of its sections is dedicated to analyzing the liability of the directors in the insolvency situation.

22. As a specialty of directors’ corporate liability, directors’ liability in bankruptcy proceedings is limited to the analysis of whether the actions of the directors during their term of office have caused or aggravated the insolvency situation and, on the other hand, whether the directors have filed for bankruptcy within the legally established period or whether the delay in filing has caused or aggravated the insolvency situation of the company.

23. Therefore, the insolvency liability procedure in Spain is very complicated, but it basically tries to penalize those situations in which Directors: (i) have so delayed the filing of the insolvency proceeding that the insolvency situation has worsened as a result of this delay, with the corresponding detriment to the creditors who had contracted with the company during the period in which the company should have already been in insolvency proceedings, (ii) have carried out actions to the clear detriment of creditors such as (a) asset stripping the company (ii) payment of credits altering the par conditio creditorum (iii) payment of credits of `specially related persons’ (shareholders, administrators, etc.).

1.3. Criminal liability.

24. The Spanish Criminal Code includes various offenses related to the actions of the administrators and which fall within the scope of the so-called corporate offenses.

25. In this area the actions considered as an offense are:

a. Falsification of documents

b. Imposition of abusive or detrimental agreements to the corporate minority

c. Imposition of abusive or detrimental agreements to the corporate minority

d. Obstruction of the inspection or supervisory actions of the administration.

Olga Vázquez
Corporate, Commercial and Bankruptcy

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