Directors’ Liability in Spain

The civil liability of directors in Spain is regulated in the “Ley de Sociedades de Capital” (Real Decreto Legislativo 1/2010, July 2nd).

Ordinary Liability

The directors of companies (“administradores” o “consejeros” in Spanish legislation), whether de facto or de jure, are civilly liable for their actions, if all the following circumstances are met:

• if they perform acts or omissions contrary to the Law, the bylaws of the company or if they fail to comply with the duties inherent to their position;
• if such conduct causes damage or harm either to the company or to third parties;
• if there is a causal link between the conduct of the director and the damage caused.

If there are several directors in a company, they will all be jointly and severally liable for a harmful act produced by one of them, except those who prove that they did not intervene in the adoption and execution of the harmful act/s or omission/s, since they were unaware of their existence or that, being aware of them, they did everything possible to avoid the damage or, at least, they expressly opposed them.

Penalty Liability

The directors of a company will be jointly and severally liable for the corporate obligations arising after the occurrence of the legal cause of dissolution of the company they manage, in the event that they fail to comply with their obligation to call a General Meeting of Shareholders of the company within two months from the date they were aware (or should have been aware) of the cause of dissolution, in order to adopt, if appropriate, the resolution of dissolution of the company.

In such case, the directors who do not request the judicial dissolution or, if applicable, file the insolvency proceedings of the company, within a period of two months from the date scheduled for the holding of the General Meeting of Shareholders of the company when this has not taken place, or from the day the General Meeting of Shareholders of the company took place, when the resolution has been contrary to the dissolution.

Bankruptcy Liability

Regarding the liability of the directors in the insolvency proceedings, the directors have the duty to request the declaration of insolvency of a company within two months from the date on which they were aware or should have been aware of the insolvency situation of the company.

When the directors intentionally or due to gross negligence cause or aggravate the insolvency situation of the company, the insolvency will be classified as guilty; this will have consequences for the directors, such as the disqualification to be a director for a period of two to fifteen years, the loss of the rights to collect the amounts owed to them by the company, and the obligation to return what they have collected in the insolvency proceeding; as well as the obligation to compensate for the damages caused.

The civil liability of the directors can be requested by means of a social action or an individual action.

The action of social liability can be exercised by:

• the company, by resolution adopted by ordinary majority at the General Meeting of Shareholders;
• shareholders representing 5% of the capital stock may request the calling of a General Meeting of Shareholders of the company to decide on the exercise of a corporate action against a director. These shareholders may bring the action themselves when the company does not do so;
• the company's creditors, on a subsidiary basis when the action has not been brought by the company or the shareholders, and the assets of the company are insufficient to satisfy their credits.

The individual action can be exercised by:

• any person whose interests are injured, whether a shareholder, creditor or third party, provided that the requirements of negligence, fault or fraud in the actions of the directors themselves are met. This is an action for compensation for damages suffered directly and individually by the shareholders or by third parties and not by the company, caused by acts of the directors of the company, and therefore it is required, in order to be able to exercise it, to prove the damage caused to the person exercising it, in its individual patrimonial interests.
  

The Spanish Criminal Code establishes and prosecutes the criminal liability of the company directors and also the criminal liability of the legal entity itself (the company).

A company may be criminally liable for a series of offenses listed in a so-called corporate "catalog of offenses"; in turn, company directors may be criminally liable for those same offenses or for other offenses not included in such catalog; this obviously requires that the director's conduct be classified as a crime in the Criminal Code.

The main offenses that may generate liability for companies and their directors in Spain are the so-called:

• corporate crimes,
• crimes against workers,
• tax crimes and
• economic crimes.

In order to determine the liability of a director or an executive of a company in Spain, it is necessary to consider not only the denomination of the position of the director (whether or not he/she is a de jure director of the company) but also whether the director or executive behaves as if he/she were a de facto director of the company.

The director of a company will be criminally liable for the crimes he commits acting in the exercise of his/her position, even if he/she does not meet the conditions, qualities, or relationships that the corresponding figure of the crime requires in order to be considered as a perpetrator of such crime. That is to say, the Criminal Code establishes that, even if the director does not actively commit a crime, even if he/she is not the person who "carries out the criminal act", he/she may be liable for omission in the performance of his duties.

On the other hand, the mere fact of being a director of a company does not imply per se, that he/she is necessarily liable for a criminal offense; it will be necessary to prove that the director has performed an action or omission that has contributed to the material execution of the criminal offense.

In conclusion, a director of a company in Spain will be liable when a criminal act can be attributed to him/her, either by action or omission.

A director, by the mere fact of being a director, has the presumption of being the one who controls the facts occurred in a company. This presumption can be rebutted if the contrary is proven in the process, that is to say, if it is evidenced in the process that he/she neither had knowledge of the criminal act nor neglected his/her functions to know about it. However right of “ presumption of innocence “ is granted to any director or officer, that means that the Public Attorney should be the responsible to demonstrate the criminal liability and not the director.

In order to limit the liability of the companies and their directors, it is necessary to draw up a criminal risk map in accordance with the corporate purpose of the company, where it must be identified the main sources of risk of committing crimes and their levels of risk in the scope of its actions and those of its directors.

The commission of crimes attributable to the company may entail liability for the directors for not having taken all the necessary measures to prevent the crime.

The Criminal Code allows the company (and consequently its directors) to be exempted from criminal liability if it has initiated, promulgated, and established a criminal compliance plan system to identify criminal risks, design and implement internal policies and processes to avoid such risks, train its employees, managers and directors, and monitor compliance. To this end, it is essential for the directors to be the driving force behind the implementation of such plan.

On the other hand, not adopting the plan or designing it and not carrying out a recurrent follow-up of its application can lead to the criminal liability of the company and its directors.

Criminal offences generally may be reported by any person either damaged or not, and by the Attorney General Office.

Exception made for those which are considered personal offenses, which require that the person offended personally reports the criminal offence (such as the cases of “false accusation and/or injury”).

Civil liability actions against directors are subject to the statute of limitations of four years from the date on which they can be exercised.

Civil liability actions against companies are subject to the statute of limitations of five years from the date on which they may be brought, as this is the maximum statute of limitations in Spain.

In criminal liability actions against companies and/or their directors, either individually or jointly, the statute of limitations depends on the penalty for each offense, with a range of statutes of limitations from one year (for minor offenses and private offenses "libel and slander"), to twenty years for offenses carrying the most serious penalties.

Directors & Officers (D&O) liability policies are widely used by Spanish listed companies and by large and medium-sized non-listed companies. Usually, the companies directly contract and pay for this type of policy for their directors.

It is important to explicitly state in the policy whether it covers all the companies of the group in which an individual acts as director, regardless the country where the company is based.

D&O liability policies do not cover directors' liabilities arising from malicious acts, nor do they usually cover liabilities arising from negligent acts. However, what is usually guaranteed is the payment of the provision of bonds and guarantees, as well as the defense expenses in cases of criminal liability, such defense expenses are usually guaranteed and covered, regardless the fact that, in a hypothetical criminal conviction, the civil and criminal liabilities are not assumed.

It is also important to bear in mind the retroactivity term, that is, the term for which the policy, having reached its expiration date, covers the contingencies and liabilities arising after its termination for a determined term subsequent to said policy termination term.

The liability should be the same between executive directors, non-executive directors and independent directors. It does not depend on the “title” of the director but on his behaviour and the development of his activity in the company.

The holding company is not responsible for the acts of the directors appointed by such holding company.

The company to which the directors serve his office (but not the holding-parent company) could be liable (civil or criminal liability depending on the situation) because of the actions of its directors.

The only situation in which a parent company could become liable from actions of the subsidiary is in the scenario of the “veil lifting” which only works when the incorporation of the subsidiary has a fraudulent purpose.