(66) Understanding Legal Responsibilities of Directors in Spain

Introduction

Every director of a legal entity assumes a leadership role that entails a series of far-reaching legal responsibilities. It is staggering how unaware the vast majority of people serving as directors are of the consequences of breaching their duties. Such failures can lead to significant repercussions that directly affect their personal assets. Anyone serving as a company director should have a clear and comprehensive understanding of the responsibilities they face and the keys to prudent and diligent management.

Spanish regulations, primarily through the Capital Companies Act (Ley de Sociedades de Capital – LSC), establish a framework for directors based on two fundamental pillars: the duty of care and the duty of loyalty. Acting with the diligence of a prudent businessperson and in the best interest of the company is the guiding principle for all of a director’s decisions. When this principle is breached, liabilities arise.

These liabilities can be classified into three main areas: civil, criminal, and administrative.

Civil Liability: Harm to the Company, Shareholders, or Creditors

Civil liability is the most common and arises when a director’s actions or omissions cause direct economic damage. This liability can be enforced by the company itself, by its shareholders, or even by its creditors.

Types of Civil Liability Actions:

• Corporate Action for Liability (Acción Social): This action is brought by the company itself against its directors when it believes their actions have harmed the company’s assets. For example, if a director approves a disastrous investment without conducting an adequate feasibility analysis. Another example would be transferring an essential company asset without prior authorization from the General Meeting of Shareholders.
• Individual Action for Liability (Acción Individual): This can be filed by a shareholder or a third party (such as a creditor) who has suffered direct damage to their assets as a result of the director’s actions. A practical case would be a director who, knowing the company is insolvent, incurs new debts that subsequently cannot be paid.
• Liability for Corporate Debts (Responsabilidad por Deudas Sociales): This is one of the most serious and frequent scenarios. Directors will be held jointly and severally liable with their personal assets for the company’s debts if they fail to convene the General Meeting to approve dissolution when a legal cause for it exists (e.g., losses that reduce net equity to less than half of the share capital). This may seem like an isolated event, but in the context of SMEs, there are more examples than one might think of directors who file accounts with negative equity and fail to convene the General Meeting to propose a solution or, if necessary, dissolution. The most serious part is that they are unaware they are assuming joint and several liability and that any creditor could go after their personal assets. If they were aware, this situation I describe would surely not occur so frequently.

Practical Examples of Civil Liability:

• A director who issues a bad check in the company’s name, knowing it is insolvent, can be ordered to personally cover the payment.
• Using privileged information obtained by virtue of their position to gain a personal benefit or a benefit for a third party, to the detriment of the company.
• Failing to file the annual accounts with the Commercial Registry, if it is proven that this omission caused harm to a creditor who relied on an appearance of solvency that was not real.

Criminal Liability: When Mismanagement Becomes a Crime

In the most serious cases, a director’s actions can cross the line from civil matters into the realm of the Criminal Code. Corporate crimes are specifically defined and carry penalties of imprisonment and fines.

Main Corporate Crimes:

• Falsifying annual accounts or other corporate documents: Presenting a distorted picture of the company’s economic situation to attract investors or deceive creditors. It must be remembered that the responsibility for preparing the accounts lies with the directors. One cannot claim ignorance and assign blame to the accountant, who holds no such liability in Spain. The responsibility rests entirely with the director. If there is any doubt about the work of the professionals handling the company’s accounting, it is best to request «due diligence» or a «second opinion.» Audits, when conducted by reputable firms, provide a great guarantee. However, in the SME world, they are often not mandatory as companies do not meet the legal thresholds.
• Imposing abusive agreements: Taking advantage of a majority position to adopt resolutions that benefit the director or a group of shareholders to the detriment of the rest.
• Disloyal or fraudulent administration: Fraudulently disposing of company assets or incurring obligations to its detriment, causing an economically assessable damage.
• Denial of shareholder rights: Unjustifiably preventing the exercise of the right to information, participation in management, or pre-emptive subscription rights.

Examples of Jurisprudence in Corporate Crimes:

• Convictions of directors for diverting company funds to their personal accounts or to related companies.
• Cases where the manipulation of accounting records to hide losses and feign solvency before financial institutions to obtain financing has been proven.

Administrative Liability: Debts to the Tax and Social Security Agencies

Public administrations, such as the Tax Agency and the General Treasury of the Social Security, have mechanisms to shift liability for the company’s debts to the directors.

Grounds for Shifting Liability:

• Subsidiary Liability: If the company is declared bankrupt, the administration can demand payment of tax or Social Security debts from the directors. To do so, it must be proven that the directors did not act with due diligence in fulfilling the company’s obligations.
• Joint and Several Liability: In cases where a company ceases activity without proper liquidation or when an concealment of assets to prevent collection is demonstrated, the director’s liability can be declared joint and several. This means the administration can pursue either the company or the director from the outset.

Practical Example:

• A director who, facing imminent insolvency, fails to pay the employees’ income tax withholdings (IRPF) or Social Security contributions may be declared subsidiarily liable for those debts.

Prevention: The Best Strategy

From my strategic financial consulting perspective, the key to avoiding these liabilities lies in proactive and diligent action. I recommend the following:

• Knowledge and Regulatory Compliance: Stay continuously updated on the commercial, tax, and labor legislation that affects your sector and the life of the company. Often, the director is also the entrepreneur and focuses on business matters, neglecting corporate issues due to a lack of awareness or interest. The responsibility of the corporate area cannot be delegated; what can be delegated is the gathering of necessary information to have all the tools to make the right decisions.
• Diligence in Decision-Making: Ground all your decisions in sufficient and verified information. It is essential to be able to prove that you have acted in good faith and with the diligence of a «prudent businessperson.» Whenever a director demonstrates diligence in their work, they avoid assuming liability.
• Transparency with Shareholders: Maintain fluid and transparent communication with the General Meeting, promptly reporting on the economic situation and strategic decisions.
• Professional Advice: Surround yourself with a team of trusted legal, tax, and financial advisors who provide the necessary support for informed decision-making. Even with an in-house team, it is difficult to cover all areas of expertise, so relying on external advisors for more complex or less frequent business areas is often one of the most profitable, business-supporting decisions.
• Monitoring Financial Health: Continuously monitor the company’s equity and financial situation. At the first sign of difficulties, act swiftly to adopt the necessary corrective measures or, if required, initiate dissolution or insolvency proceedings in a timely manner. No one wants to make that decision, but delaying a painful choice usually leads to worse consequences for all company stakeholders, such as employees, creditors, and government agencies, which in turn entails more risk for the director.
• Formalizing Agreements: Properly document all relevant decisions of the board of directors and the General Meeting through the corresponding minutes. If you do not have a trusted lawyer within the company, find one externally who can cover this need. Every decision supported by documentation will prevent problems and misunderstandings when you have acted in good faith, as it will be easier to prove.

Being a company director is a position of great responsibility. Acting with prudence, professionalism, and a deep understanding of your legal obligations will not only protect the future of the company but also your own assets and reputation.

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If you are a director and have read this article, I would like to ask you a question. Were you aware of what you could face, or has everything discussed been new to you?