The liability of directors in corporate insolvency situations

The liability of directors in corporate insolvency situations

Corporate insolvency is a critical situation in a company’s life that can have serious legal consequences for its directors. Commercial law establishes a series of obligations for company directors to protect the interests of creditors, employees, and other stakeholders. Failure to comply with these obligations can result in personal liability and financial penalties.

Directors’ Obligations in the Event of Insolvency

Company directors have a duty to act diligently and responsibly when the company is facing financial difficulties. Their main obligations include:

1. Duty of diligence and loyalty: directors must act in the interest of the company and its creditors, avoiding any actions that could worsen the insolvency situation.
2. Calling a general shareholders’ meeting: in case of significant losses that reduce net assets below half of the share capital, directors must convene a meeting to take appropriate measures.
3. Filing for insolvency proceedings: if the company is insolvent, directors are required to file for insolvency proceedings within two months of becoming aware or having to be aware of the insolvency.

Types of Directors’ Liability

Failure to fulfill the above obligations can lead to different types of liability for directors:

1. Commercial liability. They may be disqualified from holding administrative positions in the future and they may be removed from office by the shareholders’ meeting or by a court ruling.
2. Civil liability. Directors may be held liable to the company, creditors, and third parties for damages resulting from their negligent management. If it is proven that they have caused harm to the company, they may be required to provide compensation.
3. Insolvency liability. In insolvency proceedings, if it is proven that the directors have worsened the insolvency situation or have acted fraudulently or with gross negligence, the judge may declare the insolvency as culpable and impose personal liability on them. In extreme cases, they may be required to cover the company’s debts with their own assets.
4. Criminal liability. In cases of fraud, asset stripping, or document falsification, directors may face prison sentences and fines.

Tips to Avoid Liability

To minimize the risk of liability in insolvency situations, directors should:

• Maintain transparent and well-documented management.
• Act diligently and anticipate financial problems.
• Seek financial and commercial advice at the first signs of crisis.
• Not delay filing for insolvency proceedings if insolvency is imminent.

The liability of directors in insolvency situations is a key aspect of commercial law. A prudent and legally informed approach to crisis management can prevent severe legal consequences. Therefore, it is essential for directors to understand their obligations and adopt a preventive strategy at the first signs of insolvency.