When a Director Answers with Personal Assets

A private limited company is called that because it limits the liability of its shareholders to the capital they contributed. It says nothing about the directors. That is where many business owners discover, too late, that their own home fell within the perimeter.

The liability shield has gaps

Being a shareholder and being a director are different things, even though in most Spanish SMEs they are the same person. As a shareholder, your risk stops at what you contributed. As a director, the Spanish Companies Act (Ley de Sociedades de Capital, "LSC") imposes duties of its own, and breaching them can reach your personal assets.

There are two main routes, and they should not be confused with each other: liability for damage, and liability for company debts under article 367.

Duties breached without realising it

The Companies Act builds the role of director around two duties:

• Diligence: performing the role with the diligence of an orderly businessperson, devoting the necessary time to it and gathering adequate information before deciding.
• Loyalty: acting in the company's best interest, with the specific obligations of not using the company's name for personal gain, not taking advantage of business opportunities that belong to the company, avoiding conflicts of interest, and not competing with the company.

Set against the duty of diligence is the so-called business judgment protection: strategic decisions taken in good faith, without personal interest, with sufficient information and through an adequate decision-making process, are not reviewed on the basis of their outcome. Losing money is not, by itself, liability. Deciding blindly can be.

First route: liability for damage

Directors are liable to the company, to its shareholders, and to its creditors for damage caused by acts or omissions contrary to the law or the company's bylaws, or carried out in breach of the duties inherent to the role, provided there was wilful misconduct or negligence.

This route runs through two separate claims: the derivative action, which seeks to repair damage caused to the company's own assets, and the individual action, brought by whoever has suffered direct damage to their own assets.

It requires proving three things: the wrongful conduct, the damage, and the causal link between the two. It is not enough that the business went badly.

Second route: failing to dissolve in time

This is the route that has cost the most personal assets in Spain, and the more avoidable of the two. Article 367 of the Companies Act establishes that directors are jointly and severally liable for company obligations arising after a statutory ground for dissolution occurs, if they fail to call a shareholders' meeting within two months to resolve on dissolution, or to apply to the court for it.

The ground that comes up most often is losses that reduce net worth to below half the share capital. This is an accounting situation, not a cash-flow one: a company can be paying its bills on time and still meet the statutory ground for dissolution without anyone having checked.

Note how the mechanism works: it does not cover all debts, only those arising after the ground for dissolution appeared. And liability does not arise from having incurred losses, but from failing to react within two months. It is liability for omission, and that is precisely why a timely accounting review can avoid it.

The law does not penalise losing money. It penalises continuing to take on debt as if nothing had happened.

How to cut off the risk

• Monitor net worth with interim closings, not only on 31 December. By the time it is caught at the annual close, several months have usually already passed.
• React within the two months: increase capital, reduce it, have shareholders contribute funds, or call a meeting to resolve on dissolution. Any of these interrupts the mechanism.
• Document the decisions. Minutes of the management body recording the information considered and the reasoning. This is what later proves diligence.
• Formalise your resignation if you step back from management: until the resignation is documented and recorded, you will keep appearing as director for all purposes.
• Consider pre-insolvency instruments before insolvency sets in. They exist to negotiate without reaching formal insolvency proceedings, and their own deadlines run too.

The de facto director

One last point that surprises people who thought they were in the clear. Liability does not only reach whoever is formally registered at the Commercial Registry: it also reaches the de facto director, meaning whoever actually performs the functions of management without formal title, or whose appointment has expired.

Putting a third party in as nominal director while you keep making every decision does not transfer the liability. In practice, it makes it worse: it adds an appearance of concealment that the court will have to explain away.

Where this is handled in the province

Claims for director liability, along with insolvency proceedings, are heard by the Commercial Courts of Las Palmas (Juzgados de lo Mercantil de Las Palmas). Corporate filings — changes of director, resignations, dissolutions — fall under the Commercial Registry of Las Palmas (Registro Mercantil de Las Palmas).

That last point has a direct consequence: until a resignation is filed, the outgoing director keeps appearing as such to third parties. In a province where many companies have a family structure and changes are agreed verbally, this is one of the oversights that ends up costing the most.

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Notice: this article is for general information purposes and reflects the law in force on its publication date. It is not legal or tax advice for any specific case. Before making any decision, consult a professional.