The liability of the corporate director

The liability of the corporate director

As we have mentioned on several occasions in this blog, shareholders, who are mostly capitalists, i.e., those who have contributed capital to the company, are generally only liable up to the amount of their contribution.

But what about the director? They are the ones who, in fact, manage the company daily, making many of the business decisions.

As a general rule, directors should not be overly concerned as long as they act with reasonable diligence. Additional liability arises only when their conduct deviates from the reasonable standards expected of someone in their position.

Below, we will analyze the potential liabilities of an average director in a limited liability company, leaving aside administrative matters, which could be a topic for another post.

From the Perspective of Corporate Law

A. Corporate Action for Liability Against Directors

This action can be brought by the company, represented by its shareholders, when it is believed that the director has acted against the interests of the company.

The purpose of this action is to compensate the company for any damages caused and, potentially, to remove the director from their position.

Requirements for filing:

• Shareholders representing at least 5% of the share capital may request this action.
• Approval requires a simple majority at the shareholders’ meeting (unless otherwise agreed in private agreements).

In many cases, depending on the shareholder structure, this action may not succeed if the majority shareholders do not support it.

B. Individual Action Against Directors

This action allows shareholders or third parties to claim compensation for direct damages to their personal assets caused by the director’s negligent or intentional actions.

Typical scenarios:

• Poorly managed contracts that harm a third party.
• Deliberate decisions that directly and individually affect a shareholder.

Unlike the corporate action, here the damage is not to the company as a whole but to a specific individual, who is therefore entitled to file a claim independently.

C. Breach of Directors’ Duty of Care and Loyalty

Article 227 of the Spanish Companies Act states:

Directors must perform their duties with the loyalty of a diligent representative, acting in good faith and in the best interest of the company.

Failure to comply with this duty may lead to the following consequences:

• Obligation to compensate for damages caused to the company’s assets.
• Restitution to the company of any unjust benefits obtained fraudulently or improperly.

It is crucial for directors to properly document their decisions and ensure they align with the company’s interests to protect themselves against potential claims.

From the Perspective of Criminal Law

In criminal matters, directors may incur liability if their actions constitute crimes as defined in the Penal Code. Although the offense of “mismanagement” has been removed as a standalone category in Spanish law, its effects are now covered under:

• Fraud.
• Misappropriation.

This means that a director who improperly disposes of company assets against the company’s interests or fraudulently could face significant criminal liability, including prison sentences, depending on the severity of the acts.

Conclusion

The responsibility of corporate directors is a broad and multifaceted topic. From corporate law to criminal law, their actions must always be guided by the principles of diligence, loyalty, and good faith.

A director who fulfills their legal obligations, documents their decisions, and acts in the best interest of the company can significantly reduce the risk of liability.

As always, we recommend that companies and directors seek specialized legal advice to prevent disputes and protect the interests of both the company and its directors.