Directors’ Liability in Spain

28-10-2014

Article by Rodolfo Fernandez

The purpose of this workshop is comparing the applicable law in different jurisdictions related to the liability of the directors and board members of the companies.

We have prepared some key questions that we consider are the practical approach for comparing the legal actions and situations in each jurisdiction.

The objective is to have a good range of information about the situation and opportunity of success of the legal actions against directors and the liability consequences. We know that the criteria could vary substantially from one country to another and also the time for obtaining a judgment, the feasibility of certain processes, the arbitration as a good solution…

We will discuss the information offered by participants during the workshop, and in the following days or weeks we will publish the results of the workshop in the IPG web site.

What is expected from you?

The questions should be answered in writing as follows. It is not expected that you provide a detailed answer but a brief crisp expert note according to your practice. For those lawyers of the same jurisdiction it is required that you work together giving a common response. If in the same country you have different statements of law corresponding to different states or regions, please indicate each.

Please indicate your name and jurisdiction in the top of your questionnaire.

Questions (SPAIN)

1) Are directors liable for management decisions?

Yes, they are liable both for management decisions and for acting on behalf of the company.

2) What are the general criteria for being liable? Ex. To cause a damage, to act with minor or soft guilt, imprudence, negligence, bad faith, fraud, malice...)

- Directors are jointly and severally liable for acting by negligence or imprudence. Even the minor guilt –according to court precedents- would be sufficient for claiming the damages caused to the company, shareholders or creditors (art. 225, 226, 236 Companies Act).

The director acting according to the legal duties and statements of law and without negligence in his behaviour is not liable for the damages caused.

- Act or omission contrary to the Law and/ or by-laws

- Produce a loss or damage.

- A link between the harmful act and the damage produced.

3) Can directors be directly liable for company debts in front of the company’s creditors without proving that directors have been guilty? In which cases?

For example in certain jurisdictions, directors are directly liable in front of the creditors of the company when they are obliged to promote the dissolution of the company and they do not do it in the required time, in certain cases, for example when losses accumulated imply that the net assets are less than half of the issued capital.

Yes, in Spain a Director could be liable for company debts in front of the company’s creditors (art. 367 LSC). For example, when there is an insolvency state or the net assets are less than the half of the issued capital, the Director should (i) do something to solve that situation, like increase capital, or (ii) promote the dissolution of the company, or (iii) request the initiation of an insolvency process (concurso de acreedores). This is, the director should notify in two months period, from the moment that the dissolution cause has a risen, to hold a Shareholder meeting in order to take one of the actions cited before, and if the shareholder meeting is not held or the decisions are contrary to the actions cited, the Director should request to the Courts the wind-up of the company, if not the Director could be liable for the company debts.

In this particular case the creditors do not require to prove the guilt or negligence of the director. The liability will be stated by the judge evidencing: 1) the effective damage of the outstanding debt 2) the relationship between the damage and the act or omission of the director.

The scholars have discussed on the opportunity to change this particular liability of directors, given that the Insolvency Act should be the right way for addressing this case.

4) Can directors be liable in case of insolvency of the company? Is this situation of responsibility frequent in your jurisdiction in insolvency cases?

The answer is yes. However the guilt, negligent, or bad faith behaviour should be evidenced for declaring the liability.

There are certain provisions in the Insolvency Act for considering the insolvency as guilty and for giving to the judge the possibility of declaring the liability of the directors for the balance between the net assets and the debts. The declaration of liability by the judge could be stated for all the balance or for a part of it, according to the judge’s decision, depending of the real behavior of the director/s and the incidence of each director in the insolvency of the company.

5) Are directors liable in the case of closing business without filing for insolvency?

Yes, you cannot close the business if in the Balance sheet there are debts. In this case the Director should request to start the insolvency process. That is, In Spain you can close the company for the reason established by the Law and the By-laws of the company. But as it is said, if there are debts the director cannot close the company.

To close the business without filing for insolvency has traditionally implied a serious infringement of the legal duties by the directors. Frequently the business closing implies the particular liability case explained in number 3. In addition to this legal action the creditors or shareholders have the right to sue the director for the direct damages caused by this particular behaviour, referred in the following question 6.

6) Do you have a specific action to sue a director when he/she produces damages not to the company but to the creditors or shareholders? Is this legal action successful for recovering the damage suffered by the claimant?

This particular action, called “acción individual” in Spanish law, is particularly focused for suing the directors for direct damages caused to creditors or shareholders assets. If the damage is caused in the assets of the company this action is not feasible but the other related legal actions can be filed.

This action is becoming very useful given that is the only legal action that continues on trial once the company has filed for insolvency. The other actions are suspended or addressed to the judge dealing with the insolvency proceeding.

7) Can persons other than directors be liable / board members? Ex. Managers, officers

The general statement is that directors are the liable in front of creditors, holders and in front of the company. In addition de facto directors are also liable.

The managers and other officers are not liable in front of third parties if they are not directors or de facto directors. However managers can be liable in front of the company that could sue the manager for damages caused by negligence of the manager in his behaviour.

8) What do you estimate would be the expected time for obtaining an enforceable judgment in a legal action before Court against the directors? For example a temporary enforcement pending of Court of Appeal decision.

A first instance judgment takes from about 8 months to one year.

The first instance judgment could be enforced by the winning party over the assets of the director condemned, without any guaranty or deposit, in the meantime the appeal is solved by the Court of Appeal.

The appeal takes about 8 months. Only in particular cases the appeal decision could be also appealed before the Supreme Court.

The temporary injunction is also feasible, for example blocking the assets of the defendant. This implies a speed process for deciding to block the assets of the director sued.

9) It is feasible/ convenient to include in the by-laws of the company the arbitration clause for claiming against directors? What is the expected time for the arbitration award?

Yes, this is a very convenient clause to include in the by-laws. Otherwise it would not be feasible to claim by arbitration. It is advisable to submit disputes in the by-laws to a Spanish court of arbitration when we set up a Spanish company.

The arbitration process in a recognized Court takes from 6 to 8 months. It could be less for simple cases. This is a one instance process, no appeal.

10) What are the expected fees and costs for a law suit like this?

The amount to claim is relevant for calculating lawyer’s fees, trial costs and court taxes.

Regarding the law fees no less than 10,000 € is usual and the fees could rise to more than 60,000 € in cases with substantial amounts to claim.

11) What is/are the usual system/s for estimating the fees? Ex. Hourly rate, cap fixed budget, success fee - quota litis.

The hourly rate basis is accepted by law firms which vary from 150 to 500€, depending on the expertise of the firm and the team in every case. Success fee is also frequent combined with a retainer fee in advance.

Barcelona, 13^th October 2014.