By Gerard Rodríguez, lawyer.
Directors and members of the Board of Directors (hereinafter referred to as directors) are responsible for the direction, management, and representation of commercial companies, and their position inherently comes with certain rights and duties.
But what happens when directors breach their duties?
In such cases, the director's liability regime comes into play, which can be in the civil realm (commercial or insolvency-related), administrative, labor, or criminal.
Directors can be scrutinized by the company, shareholders, and/or third parties (employees, creditors, public authorities, etc.), so it’s worth understanding these responsibilities in detail to avoid falling into them.
Let’s break it down:
Civil Liability of a Commercial Nature
Commercial liability refers to the obligation of the director to respond with their personal assets for damages caused to the company, shareholders, or third parties due to acts or omissions contrary to the law, the company’s bylaws, or for failing to fulfill their duties of diligence and loyalty.
Let’s take a look:
Liability for damages:
- Liability to the company is triggered when the director causes harm to the company by acting negligently, breaching the bylaws, or violating the law, as provided in Articles 236 et seq. of the Capital Companies Act (LSC). The enforcement of this responsibility is carried out through the social liability action, which can be filed by the company or the shareholders in the company’s interest.
- Liability to shareholders and third parties occurs when the damage caused by the director affects not only the company but also directly harms the shareholders or third parties (creditors), as outlined in Article 241 LSC. This is exercised through the so-called individual liability action against the director. Liability for damages is mandatory and cannot be waived or limited by the bylaws or by agreement. It requires fault or negligence and is personal to the responsible director, not the entire administrative body, and is of a joint and several nature among all the responsible directors.
Liability for debts:
- Liability for company debts occurs if the company incurs a dissolution cause (losses that leave net assets below half of the share capital, inactivity of the company, etc.) and the director fails to call a meeting to dissolve the company or request bankruptcy proceedings. In this case, the director may be personally liable for the debts incurred since the dissolution cause arose, as set out in Articles 363 and 367 of the Capital Companies Act (LSC).
- Finally, liability in the event of insolvency occurs if, in a bankruptcy proceeding, it is declared that the insolvency was aggravated by the director's fraudulent behavior or gross negligence, which is called "guilty bankruptcy" (Article 444 of the Consolidated Text of the Insolvency Law). In such cases, the director may be ordered to pay part or all of the company's debts.
Tax liability: directors under the spotlight of the Tax Agency.
The directors of a company can be held responsible for the company's tax debts —the principal obligor— if they have committed infractions, failed to fulfill legal duties, or contributed to the creation or worsening of a tax debt. This responsibility is regulated in Articles 41 to 43 of the General Tax Law (LGT).
Types of tax liability
There are two types of liability: subsidiary and joint. The liability that will generally apply is subsidiary, unless a rule explicitly states otherwise.
- Subsidiary liability (Art. 43 LGT) The director is liable after the tax authority has attempted to collect from the company without success and the company has been declared insolvent. It applies when the director:
- Has not taken the necessary actions to comply with tax obligations.
- Has consented to the failure to comply with these obligations.
- Has not called a General Meeting to dissolve the company in cases of insolvency (Art. 367 LSC), generating new tax debts.
- Joint liability (Art. 42 LGT) The director is directly liable along with the company, without the need for the company to be declared insolvent, when they have collaborated in the commission of a tax offense, for example, if they:
- Cause or collaborate in the concealment of assets or tax fraud.
- Fail to remit the withheld or passed-on taxes, such as VAT or IRPF withholdings.
- Collaborate in the commission of serious or very serious tax violations.
Additionally, directors can be held responsible for tax penalties when (through action or omission) the company commits serious violations, and they may incur criminal tax liability to the extent that they are held accountable for actions classified as crimes against the Public Treasury under criminal law.
Labor Responsibility: Violation of Labor Rights and Debts with Employees and Social Security
Company directors can be personally liable for breaches in labor and social security matters.
This responsibility can arise from wage debts, non-payment of contributions, violations in occupational risk prevention, or fraud in hiring, meaning that labor, administrative, and criminal liabilities can converge.
Types of liability of the director in the labor field
- Solidary Responsibility
The director may be jointly liable, along with the company, for labor obligations in the following cases:- For non-payment of salaries and indemnities, if the director has closed the company without liquidating it or has acted fraudulently to avoid paying workers.
- For illegal worker assignment, if the company hires employees through another company without complying with subcontracting regulations (Article 43 ET).
- For fraudulent company succession, if the director transfers the business to another entity to evade labor debts. In this case, both the new and previous employers will be jointly liable (Article 44 ET).
- For serious violations in occupational risk prevention.
- Subsidiary Responsibility
The director can be subsidiarily responsible for labor debts, provided the company does not pay the debts, in the following cases:- Non-payment of social security contributions, provided the director does not act diligently (Article 18 RD 1415/2004).
- Failure to dissolve or initiate insolvency proceedings for the company in cases of insolvency (Article 367 LSC).
The director's responsibility may exceed the social jurisdiction, and they may be held criminally liable if they commit any of the following labor offenses:
- Crime against workers' rights (arts. 311, 314, 315 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 Criminal Code).
- Crime of serious risk to workers (art. 316 Criminal Code), for failing to guarantee occupational risk prevention measures, endangering employees' health.
Labor matters are very sensitive because they affect the rights of workers, who are specially protected by legislation to ensure their rights are guaranteed.
What happens if a fundamental right of workers is violated?
Three scenarios arise:
Responsibility of the Company (direct and objective) for the actions of its directors and executives in the exercise of their functions. In these cases, the worker can sue the Company and request compensation for damages.
Personal responsibility 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 administrator can be held personally liable in addition to the Company.
Joint responsibility 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: Crimes in the Corporate Field
Directors may be criminally liable for crimes committed in the exercise of their duties. This occurs when their conduct goes beyond mere negligence and falls within the scope of intentional wrongdoing or gross negligence.
Some of the crimes for which they may be held accountable include:
- Corporate crimes (arts. 290-297 Penal Code): Falsification of accounts, imposition of abusive agreements, or disloyal administration.
- Crimes against the Public Treasury (arts. 305-310 Penal Code): Tax fraud exceeding €120,000 per tax and per year, fraud of contributions exceeding €50,000, or fraudulent obtaining of subsidies.
- Crimes against workers' rights (arts. 311-318 Penal Code): Serious breaches in labor and Social Security matters.
- Punishable insolvency crimes (arts. 259-261 Penal Code): Asset concealment or creditor fraud.
- Crimes of corruption or disloyal administration: such as embezzlement, corruption between individuals, or money laundering.
- These crimes can result in prison sentences of up to 6 years, fines, disqualifications, and also entail Criminal Liability of the Legal Entity.
How can administrators protect themselves?
To mitigate the risks associated with the role of an administrator, they must adopt preventive, detective, and reactive measures such as:
- Acting with due diligence, following the principles of a “prudent entrepreneur.”
- Documenting all decisions in corporate agreements and justifying their reasonableness.
- Convening a general meeting or requesting bankruptcy proceedings in cases of insolvency.
- Rigorously complying with tax, accounting, and labor obligations.
- Taking out liability insurance for director (D&O).
- Adopting crime prevention models (MPD) or Compliance Programs to potentially exempt or reduce the Criminal Liability of the Legal Entity (the company) and, consequently, their own.
Conclusion
The role of a director is an exciting function, but it comes with significant legal responsibilities. Having adequate legal advice is key to avoiding risks and ensuring secure and efficient business management.
If you are a director or are considering taking on this role, at GRACIACALBET, we provide the necessary legal advice to ensure your responsibility and indemnity, and protect your assets.
