Company director or board member, a high-risk profession
Friday, March 7, 2025
Gerard Rodríguez
Lawyer
Directors and board members exercise the management, administration, and representation of commercial companies, and their position entails certain rights and duties.
But what happens when directors breach their duties?
In these cases, the liability regime for directors comes into play, which may fall within the civil (commercial or insolvency), administrative, labor, or criminal spheres.
Directors may be held accountable by the company, the shareholders, and/or third parties (employees, creditors, public authorities, etc.), so it is worth understanding these liabilities thoroughly in order to avoid incurring them.
Let’s analyze them:
Civil liability of a commercial nature
Commercial liability refers to the administrator’s obligation to be personally liable with their own assets for damages caused to the company, shareholders, or third parties through actions or omissions that are contrary to the law, the bylaws, or by failing to comply with their duties of diligence and loyalty.
Let’s take a look:
Liability for damages:
Liability towards the company arises when the director causes damage to the company by acting negligently, breaching the bylaws, or violating the law, as established in Articles 236 and following of the Spanish Companies Act (Ley de Sociedades de Capital —LSC—). This liability is pursued through a corporate liability action, which may be filed by the company itself or by the shareholders in the interest of the company.
Liability towards shareholders and third parties arises when the damage caused by the director affects not only the company but also directly the shareholders or third parties (creditors), Art. 241 LSC. It is exercised through the so-called individual action of liability against the director. Liability for damages is mandatory and cannot be exempted or limited by the bylaws or by agreement. It requires fault or negligence, is personal to the responsible director and not to the entire administrative body, and is joint and several among all liable directors.
Liability for Debts:
Liability for corporate debts arises if the company incurs a cause for dissolution (losses that reduce net assets below half of the share capital, inactivity of the company, etc.) and the director does not convene the board to dissolve it or file for bankruptcy. In such cases, the director may be personally liable for debts incurred from the moment the cause for dissolution arose, as established in Articles 363 and 367 LSC.
Finally, liability in the event of insolvency occurs if, in bankruptcy proceedings, it is declared that the insolvency was worsened by the director’s fraud or gross negligence, known as culpable bankruptcy (Art. 444 of the Revised Text of the Bankruptcy Law), and the director may be ordered to pay part or all of the company’s debt.
Tax Liability: Directors in the Crosshairs of the Tax Authorities
The directors of a company can be held liable for the company’s tax debts—the principal debtor—if they have committed violations, failed to fulfill legal duties, or contributed to the creation or worsening of a tax liability.
This liability is governed by Articles 41 to 43 of the General Tax Law (LGT).
Types of Tax Liability
There are two types of liability: subsidiary and joint. In general, subsidiary liability applies, unless a law expressly states otherwise.
Subsidiary liability (Art. 43 LGT) The director becomes liable after the Tax Administration has unsuccessfully attempted to collect from the company and the company has been declared insolvent. It applies when the director has failed to carry out the necessary actions to comply with tax obligations, has allowed the breach of such obligations, or has not convened a General Meeting to dissolve the company in cases of insolvency (Art. 367 LSC), thereby generating new tax debts.
Joint liability (Art. 42 LGT) The director is directly liable together with the company, without the need for the company to be declared insolvent, when they have participated in committing a tax infringement, for example if they cause or collaborate in the concealment of assets or tax fraud, fail to pay withheld or collected taxes such as VAT or personal income tax withholdings, or collaborate in committing serious or very serious tax infringements.
In addition, directors may be held liable for tax penalties when the company commits serious breaches (through action or omission), and they may also incur criminal tax liability to the extent that conduct classified as crimes against the Public Treasury under criminal law can be attributed to them.
Labor liability: violation of labor rights and debts with employees and social security
The directors of a company may be held personally liable for breaches in labor matters and social security.
This liability may arise from wage debts, non-payment of contributions, violations of occupational risk prevention regulations, or fraud in hiring, which may lead to overlapping labor, administrative, and criminal liability.
Types of director liability in the labor field
Joint liability
The director may be jointly liable, together with the company, for labor obligations in the following cases:
For non-payment of wages and severance, if the director has closed the company without liquidating it or has acted fraudulently to avoid paying the employees.
For unlawful transfer of workers, if the company hires employees through another company without complying with subcontracting regulations (Art. 43 ET).
For fraudulent transfer of a business, if the director transfers the business to another entity to evade labor debts. In this case, both the new employer and the former one will be jointly liable (Art. 44 ET).
For a serious violation of occupational risk prevention regulations.
Subsidiary liability
The director may be subsidiarily liable for labor debts, provided that the company does not pay them, in the following cases:
Non-payment of social security contributions, provided that the director does not act diligently (Art. 18 RD 1415/2004).
Failure to dissolve or file for insolvency of the company in case of insolvency (Art. 367 LSC).
The director’s liability may go beyond the labor jurisdiction, and they may be held criminally liable if they commit any of the following labor-related crimes:
Crime against workers’ rights (Arts. 311, 314, 315 of the Criminal Code), for imposing illegal or fraudulent working conditions or violating fundamental rights.
Crime of non-payment of wages or social security contributions (Art. 307 of the Criminal Code).
Crime of serious risk to workers (Art. 316 of the Criminal Code), for failing to ensure occupational risk prevention measures, thereby endangering employees’ health.
Labor matters are very sensitive because they affect workers’ rights, which are specially protected by legislation to ensure their safeguarding.
What happens if a fundamental right of workers is violated?
Three scenarios arise:
Liability of the company
(Direct and objective), for the actions of its directors and executives in the exercise of their duties. In these cases, the worker may sue the company and claim compensation for damages.
Personal liability of the director
(When there is intent or gross negligence), when the director has ordered, allowed, or facilitated the violation of fundamental rights. In these cases, the director may be personally liable in addition to the company.
Joint liability of the company and the director
When there is fraud, abuse of power, or intent, in which case they will be jointly liable.
Criminal liability: corporate crimes
Directors may be held criminally liable for crimes committed in the exercise of their duties. This occurs when their conduct goes beyond mere negligence and enters the realm of intent or gross recklessness.
Thus, some of the crimes for which they may be held liable are:
Corporate crimes (Arts. 290–297 of the Criminal Code): falsification of accounts, imposition of abusive resolutions, or disloyal management.
Crimes against the Public Treasury (Arts. 305–310 of the Criminal Code): tax fraud exceeding €120,000 per tax and fiscal year, fraud in social security contributions exceeding €50,000, or fraudulent obtaining of subsidies.
Crimes against workers’ rights (Arts. 311–318 of the Criminal Code): serious breaches in labor and social security matters.
Crimes of fraudulent insolvency (Arts. 259–261 of the Criminal Code): asset stripping or creditor fraud.
Crimes of corruption or disloyal management: such as misappropriation, private sector corruption, or money laundering. These crimes may carry prison sentences of up to 6 years, fines, disqualifications, and may also entail the Criminal Liability of the Legal Entity.
How can directors protect themselves?
To mitigate the risk associated with the role of director, they must adopt preventive, detective, and reactive measures such as:
- Act with due diligence, following the principles of a “prudent businessperson.”
- Document all decisions in corporate resolutions and justify their reasonableness.
- Convene a general meeting or file for insolvency proceedings in situations of insolvency.
- Strictly comply with tax, accounting, and labor obligations.
- Take out directors and officers (D\&O) liability insurance.
- Adopt crime prevention models (MPD) or Compliance Programs to have the Criminal Liability of the Legal Entity (the company) exonerated or mitigated, and consequently their own.
Avoid risks: protect your liability as a director
The role of director is an exciting position but carries significant legal responsibilities. Having proper legal advice is key to avoiding risks and ensuring safe and efficient business management.
If you are a director or are considering taking on this role, at GRÀCIACALBET we provide the legal advice necessary to safeguard your liability and immunity, and to protect your assets.
