Directors’ duties and personal responsibilities under Spanish Law

Being a director of a company involves assuming a high level of personal risk. 

During periods without financial difficulties, directors must conduct their duties with diligence and loyalty, avoid conflicts of interest, avoid personal liability before the company, cause by any unlawful action or omission damage to shareholders and creditors, and ensure no breach of by-laws and their duties. 

Periods of financial difficulty place directors under significant pressure both commercially and legally; however, the responsibilities and duties of the directors can change depending on the financial position of the company. In some scenarios, directors must protect creditors’ interests, and may need to prioritise them over the interests of shareholders. If the director’s duties are not properly discharged through the rules governing when the company requires dissolution or a director does not properly apply the pre-insolvency and restructuring tools or insolvency mechanisms, directors can face personal liability or disqualification.

An awareness of these issues is also important for directors of financially healthy companies for several reasons. Firstly, the financial position of a company can decline rapidly, and sometimes unexpectedly. Secondly, a healthy company may have commercial dealings with a counterparty experiencing financial difficulty. Being aware of these issues can help anticipate how the counterparty may behave in ongoing dealings and negotiations. Anticipation is the key issue. 

When net assets are below one half of the share capital of a company, it constitutes a legal cause for dissolution under article 363.1(e) of the Spanish Companies Act. 

When this circumstance arises, the company’s directors have a statutory duty to convene a shareholders’ meeting within two months in order to adopt a resolution to dissolve the company or agree on measures to remove the cause of dissolution (e.g. by recapitalisation, capital reduction and simultaneous increase, or restructuring liabilities). Failure to do so could bring significant legal consequences.

Pursuant to Article 367 LSC, where directors fail to fulfil this duty and the company continues to operate while the dissolution cause persists, they become personally and jointly liable for all corporate obligations incurred after the occurrence of the cause for dissolution. This liability is objective, which means it does not depend on fault or negligence. It arises automatically by operation of law once the directors fail to act within the statutory period.

In this scenario, each director can be required to pay the full amount of the company’s post-breach debts without prejudice to their contribution rights among themselves.

To avoid such risks, it would also be advisable to consider initiating a pre-insolvency restructuring process under the Spanish Insolvency Act, which firstly requires the filing of a communication. From the date of this communication, the debtor benefits from protection of up to three months during which enforcement actions against the debtor’s assets are stayed if certain requirements are met. This stay applies to both secured and unsecured claims with limited exceptions. The company may also request an additional three-month extension if it can demonstrate that negotiations are progressing towards a restructuring plan.

The restructuring plan is a negotiated instrument designed to modify the debtor’s liabilities, equity, or business structure with the purpose of restoring its viability. It must necessarily be accompanied by a viability plan, setting out the measures envisaged to ensure the company’s short and mid-term sustainability. Such measures often include cuts and deferrals, as well as potential reductions in workforce, termination of onerous contracts, or the sale of non-core assets. The plan may not, however, affect labour or public law claims (understood as tax and social security debts, in general terms), which are expressly excluded from its scope.

Once a restructuring plan is approved by a majority of creditors, it may be submitted to the court for judicial confirmation. For the judicial confirmation to be granted, the plan must meet certain majority thresholds within each class of creditors, which vary depending on how the structure of the creditor’s classes has been configured. If the required majorities are achieved, the court may approve the plan and extend its effects to dissenting creditors.

After obtaining judicial confirmation, dissenting creditors retain the right to challenge the court order confirming the plan through a specific judicial proceeding. Such challenges are limited to specific grounds, including disproportionate treatment among creditors or breach of legal majorities. If the court upholds an objection, it may declare the plan inapplicable to the challenging creditors or, in more severe cases, it may declare the plan null, thereby restoring the debtor’s pre-existing obligations and compelling the company to file for voluntary insolvency.

Overall, the pre-insolvency mechanism would reduce the risk for the liability of the directors, as well as provide them with a flexible framework for restructuring the financial obligations of the company while avoiding the stigma and rigidity of a formal insolvency proceeding, and keeping the business alive. It also allows management to retain control of operations and negotiate directly with creditors or clients with the collaboration of an appointed expert. If properly executed, this mechanism may preserve value for all stakeholders and limit liability exposure for directors and shareholders.

During the insolvency proceeding, the court appoints an insolvency practitioner, whose role would be to either supervise or replace directors, depending on the circumstances of the filing. If the insolvency is voluntary, management usually retains limited powers of administration under the insolvency practitioner’s oversight. If it is a compulsory insolvency proceeding (initiated by a creditor), the insolvency practitioner would assume full control. The insolvency practitioner is responsible for verifying the debtor’s assets and liabilities, analysing management conduct and preparing reports for the court and creditors.

Insolvency proceedings can also be used strategically to preserve or transfer value. Insolvency rules allow the company or an interested investor to propose the sale of the production unit either before (i.e. prepack) or upon filing for insolvency. In practice, an expert or advisor can be selected to identify potential buyers, or even to submit the insolvency petition accompanied by a binding purchase offer for the production unit. These transactions, when properly structured and approved by the court, can preserve jobs, maintain the operational continuity of profitable divisions and maximise recoveries for creditors.

Throughout insolvency proceedings, the conduct of directors and de facto managers during the two years preceding the insolvency request is subject to judicial review. The court examines whether the insolvency was caused or aggravated by mismanagement. Certain circumstances give rise to a presumption of culpability. Some are rebuttable presumptions (juris tantum), such as wilful delay in filing for insolvency, failure to collaborate with the insolvency practitioner and the Judge, or failure to register their annual accounts. Others are irrebuttable (juris et de jure), including the concealment or fraudulent disposal of assets or conduct intended to harm creditors. If the insolvency is classified as guilty, the court may impose severe sanctions on the responsible directors, including disqualification from managing companies for a period of up to 15 years, loss of certain rights within the insolvency proceeding, and – most importantly – the obligation to cover the insolvency deficit from a director’s personal assets.

The insolvency may also carry potential risks for the parent companies. Under the Spanish Insolvency Act, parent entities are not automatically liable for their subsidiaries’ debts. If the parent, however, has effectively managed the subsidiary’s affairs, instructed decisions leading to insolvency, or otherwise exercised control beyond what would be expected from a shareholder/managing company, the court could pierce the corporate veil and declare the parent jointly liable for the subsidiary’s liabilities. Moreover, intra-group transactions, loans or guarantees granted in favour of the parent company may be subject to claw-back if considered detrimental to the estate or if they were executed while the subsidiary was already insolvent.