The liability of corporate directors

The liability of corporate directors

The role of a director in Spanish companies remains essential and is surrounded by obligations and risks that anyone assuming this position must understand thoroughly. Beyond the image of authority and power often associated with the role, there is a legal framework imposing duties of diligence and transparency. Understanding the scope of these responsibilities provides security both to the director and to the shareholders and third parties who interact with the company.

First and foremost, the director must act with the diligence of a “prudent businessperson” and the loyalty of someone who prioritizes the company’s interests. This entails, on one hand, continuously monitoring the company’s financial and operational situation: overseeing the accounting, ensuring that the annual accounts accurately reflect the company’s true financial standing, and guaranteeing compliance with tax and labor obligations. A brilliant strategy is useless if the company then faces tax penalties or Social Security contribution defaults. On the other hand, loyalty requires that the director not place personal interests above those of the company, avoiding any conflict of interest or situations in which they might improperly benefit from business opportunities that belong to the company.

When a director breaches these duties, civil liability arises toward the company itself and, in certain circumstances, toward third parties. If the general meeting or sole shareholder demonstrates that a director’s action or omission caused harm, such as approving accounts that conceal significant losses or failing to convene a meeting on time, they may demand compensation for damages. Beyond the internal sphere, creditors and third parties harmed by negligent decisions (for example, engaging in transactions despite knowing the company is insolvent) can claim payment of corporate debts and even obtain a court declaration of the director’s joint liability.

However, civil action is not the only risk directors face. Spanish law also provides for potential criminal liability when directors engage in wrongful conduct. This includes corporate offenses, such as fraudulently selling or manipulating shares or equity interests, as well as crimes against the Public Treasury and Social Security, which can carry severe penalties if false returns are filed or contributions are deliberately withheld. Moreover, in cases of corruption or money laundering, directors may face not only fines and damages but also prison sentences and professional disqualification for many years.

Given this convergence of risks, many companies strengthen their internal controls. Adopting a code of good governance, establishing audit committees, and fostering a culture of regulatory compliance help prevent issues before they escalate into litigation or sanctions. It is also increasingly common to take out directors’ and officers’ (D&O) liability insurance, which covers legal defense costs and, up to certain limits, the indemnities awarded in the event of a judgment.

Continuous training is another fundamental pillar. A director who stays informed about the latest amendments to the Capital Companies Act, tax changes, or developments in data protection law will significantly reduce exposure to errors. Sometimes, a small oversight, failing to file a Form 200 on time or missing an obligation to deposit accounts, can trigger a civil claim or even a criminal investigation.

Finally, it is important to remember that not all risks carry the same severity. A minor accounting irregularity may result in an administrative fine, whereas systematic fraud or a deliberately misleading declaration can lead to criminal court proceedings. For this reason, responsible management and constant oversight help reinforce the company’s reputation, build trust among investors and shareholders, and safeguard the director’s personal assets, which might otherwise be exposed to various claims.

In short, the liability of corporate directors in Spain is broad and multifaceted. It involves technical duties, such as proper bookkeeping, ethical obligations, such as loyalty to the company, and both civil and criminal risks. For anyone taking on this role, business acumen alone is not enough: it is essential to seek specialized advice, adopt good governance practices, and periodically evaluate the need for insurance policies that provide an additional layer of protection. In this way, the position of director can become an opportunity to drive the company’s growth with full legal peace of mind.