Company director liabilities

In many cases, there is confusion between the different roles in a Limited Liability Company, the director, and the shareholders. Also to what extent they are held accountable for their actions while managing a company. The issue of the company director liabilities is a very important matter that sometimes can be misleading. 

In this post, we will explain to you the role of the director of a company, his functions, and his responsibilities. Also, it is frequent and it can be the case that you may accept to be the director of a friend’s company but you are not aware of the consequences. For that reason, before you accept to be the director of a company, it is important that you take into account all the implications of the role.

First, it is necessary to clarify the difference between the roles of directors and shareholders.

Shareholders vs. Directors: who manages a limited liability company? 

The shareholders are the owners of the company, i.e., those who have contributed an economic amount to the share capital and have received a share in return. The director of a company, on the other hand, does not have to have a share in the share capital. It is normal in limited liability companies that the shareholder is also the director or plays an important role in the administration, however, it is not mandatory.

So, who is a director of a limited liability company? and what are the requirements?

According to the Spanish Companies Law, the directors of a limited liability company are responsible for the management and representation of the company. 

Requirements

It is not necessary to be a shareholder to be a director of a company. Any natural person of legal age can be a director. The law foresees some prohibitions such as, for example, persons affected by legal incompatibilities, not emancipated minors, among others.

Types of administration

• Sole director: It is only one person who occupies the role of director of the company. 
• Joint and several directors: There are two or more directors who represent the company jointly and severally, i.e., each one can bind the company. That is why there is no need for unanimity in the agreements.
• Joint directors: There are two or more directors but they have to make decisions jointly. As a disadvantage, there may be situations in which there is a blockage due to a lack of agreement.
• Board of Directors: This is a collegiate body, with 2 or more members, and a majority is usually required for majority decisions. It is not usually used in small or medium-sized companies, since management is usually more complex.

Once you are appointed and have accepted the position, you must register in the Mercantile Registry. 

Term of appointment

Normally the shareholder’s general meeting appoints the director of a company for an indefinite period. The articles of association may establish a specific term if the shareholders agree to it. Re-election for terms equal to those established in the bylaws is also possible.

Powers and Duties of a company’s director

Directors must comply with certain duties and obligations in the exercise of their office. We outline the most important of these duties below.

• Diligence. Duty to carry out the position with diligence and responsibility for the purposes for which he/she has been appointed. To comply with the legal duties and those set forth in the bylaws, having the interest of the company above the particular interest.

• Loyalty. The administrator shall perform his duties with the loyalty of a faithful representative. He must act in good faith and in the interest of the company. Violation will entail company director liabilities.

• Avoidance of conflict of interest. The aim is to prevent the director from taking advantage of his position to obtain personal benefit. The Spanish Companies Law lists, by way of example, several cases in which a conflict of interest would be deemed to exist.

As we will explain below, the breach of these duties may cause the company director liabilities.

What causes the company director liabilities?

Regarding the company director liabilities regime, the law describes the cases in which the director could have personal liability.

First of all, it is important to mention that the directors are liable to the company, the shareholders, and the creditors. That is to say, they will be liable for damages caused by acts or omissions contrary to the law or the bylaws. Also, when they fail to comply with the aforementioned duties of the position. It should be noted that it is necessary to have acted with fault or malice. That is to say, he must have acted knowing that his action was an infringement.

In summary, the conditions to claim the company director liabilities are the following:

• Damage or prejudice
• Failure to comply with legal or statutory duties.
• Fraud or fault on the part of the administrator.

Likewise, it is important to know that guilt is presumed whenever the action is contrary to the law or the bylaws and the director must prove that there has been no fault. The company’s director liabilities will not be exonerated even if there is a resolution of the shareholders’ meeting adopting, authorizing, or ratifying the resolution.

In cases of several directors, the company director liabilities will be joint and several (unless proven otherwise).

The general shareholders’ meeting, as well as the creditors, can demand the responsibility of the directors following the legal channels for it. 

Shareholders and injured third parties can also demand the company director’s liabilities if their interests have been directly harmed. 

The action of liability against the director of the company prescribes 4 years after it could have been exercised.

Special cases: Insolvency proceedings

There is a special case in which stakeholders can claim company director liabilities for the debts of the company. This is the case of an insolvency proceeding. When the director becomes aware that the company is in a state of insolvency, he/she is obliged to request the dissolution of the company or the insolvency proceedings. In order to do so, he must convene the shareholders’ meeting and has a term of two months. In case of non-compliance, he could incur liability and will have to respond for the debts of the company with the Social Security and the Tax Agency.

Do not hesitate to contact us for further information.