When does a company director become personally liable?

When does a company director become personally liable?

The figure of the director in a limited liability company constitutes an essential position within the organisational system of social capital companies. Although these companies are characterised by the separation between the company’s assets and the personal assets of the shareholders, this separation is not absolute in the case of those who perform management duties. The Spanish Companies Act (LSC) establishes a specific liability regime for directors, which may directly affect their personal assets when they fail to comply with their legal or statutory duties.

The liability regime of directors is mainly regulated in Articles 225 to 241 of the LSC. The starting point is Article 225, which imposes a general duty of care, requiring the director to act as a “diligent businessperson”, with adequate dedication and always subordinating their own interest to the corporate interest.

This standard is complemented by the duty of loyalty (Article 227 LSC), which requires acting in good faith and in the interest of the company, avoiding conflicts of interest.

Based on these duties, the liability system is structured under Article 236 LSC, establishing that directors shall be liable to the company, shareholders, and creditors for damages caused by acts or omissions contrary to the law or the bylaws, or carried out in breach of their duties, if there is fault-based liability or negligence. Furthermore, this article directly presumes fault when the conduct is contrary to the law or the bylaws.

In addition, liability is not limited solely to formally appointed directors registered with the Commercial Registry. Article 236 LSC expressly extends liability to de facto directors, meaning those individuals who, without a valid appointment, in practice perform management functions or have any kind of influence over the company’s management.

In this way, the legislature prevents the use of formal structures to avoid liability, ensuring that those who manage the company are held accountable for their decisions.

The LSC system establishes several types of liability:

• Corporate liability: this is an action brought by the company itself to claim damages suffered to its assets due to negligent or unlawful actions by the director. Its purpose is to restore the company’s damaged assets.
• Individual liability: this allows shareholders or third parties to claim directly against the director for damages that have been directly caused to them. This action requires that the damage is not merely indirect or derived from harm suffered by the company, but rather autonomous and personal to the affected party.
• Liability for corporate debts: one of the most significant cases is included in Article 367 LSC, which establishes joint and several liability of the director for company debts when they fail to convene a general meeting within the legal deadline to resolve dissolution or to file for insolvency proceedings in the event of a statutory cause for dissolution (such as losses reducing net assets below half of the share capital). This type of liability is particularly strict, as it can become almost strict liability if the formal duties of action in crisis situations are not fulfilled.

 

Article 226 LSC introduces the so-called “business judgment rule”. Under this rule, directors shall not be liable for strategic decisions if they have acted in good faith, without personal interest, with sufficient information, and through an appropriate decision-making process. This provision protects legitimate business decision-making, preventing courts from substituting managerial judgment with their own economic assessment, provided that the decision-making process was reasonable.

For director liability to arise, three essential elements must be present:

• An unlawful act or omission (contrary to law, bylaws, or duties of the office).
• Actual damage to the company, shareholders, or third parties.
• A causal link between the conduct and the damage.

 

In addition, a subjective element of fault or intent is required, although in certain cases such as Article 367 LSC this requirement is significantly relaxed.

The consequences for directors can be very serious. In civil terms, they may be required to compensate with their personal assets for the damages caused or to cover corporate debts. In more complex situations, such as wrongful insolvency proceedings, they may even be disqualified from managing assets belonging to others and ordered to cover the insolvency shortfall.

This demonstrates that the role of a director is not merely representative, but rather a position of significant legal risk that requires strict compliance with legal duties.

To conclude, personal liability of directors in a limited liability company constitutes an essential mechanism for protecting legal transactions and the interests of shareholders and creditors. Although the limited liability company restricts shareholders’ liability to their contributed capital, this protection does not extend to those who manage the company. The Companies Act establishes a balanced system: it protects entrepreneurial initiative through managerial discretion, but in return requires diligence, loyalty, and strict compliance with the law.