Scope

This Article is subject to Spanish legislation and considers some of the issues that arise when creditor´s rights collide with company directors’ duties. We focus particularly on the role and relevance of breaches of directors’ duties in the context of the abandonment of the company. That is to say, prior to any proper insolvency being declared.

Overall View

It is well known that the two most popular corporate vehicles in Spain – S.L. and S.A. – provide limited liability both to directors and shareholders. However, limited liability does not imply a complete protection for directors, so they must carefully consider their actions and, indeed, their failures, to act in order to avoid future liabilities.

Quite often, in the case of family run businesses and smaller companies, the directors will be substantial shareholders of the company. This can easily explain why, more often than not, claims are issued by creditors instead of by shareholders.

Director´s Duties

Directors’ duties are codified in the Spanish Companies Act. The general duties are:

  • Duty of Care

Directors must exercise the same care, skill and diligence that would be exercised by a reasonably diligent person. The expected standard is measured against both objective and subjective yardsticks. A director’s actual understanding and abilities may not be enough if more care, skill and diligence could reasonably be expected of someone in his or her position.

  • Duty of Loyalty

Directors must act in accordance with the company’s constitution, and only exercise their powers for the purposes for which they were given. The company’s constitution includes its articles of association, resolutions and any shareholders agreements, if existing any. Further, Directors must also do their best to promote the success of the company and exercise an independent judgment.

It should be noticed that the Spanish legislation extents such duties to shadow directors so that they are also considered for any wrongdoing.

Breach of Director´s Duties

Wrongful Trading

Wrongful trading often refers to the company “trading whilst insolvent. However, this is only half the story. Directors may find themselves personally liable for wrongful trading where, at some point in time, they should have concluded that the company would not be able to avoid insolvent liquidation but continued to trade. In those circumstances the director may be ordered, by the Court, to contribute to the assets of the company for the benefit of its creditors.

De-Facto Closure of the Company

Nevertheless, more and more frequently, creditors find that the company, instead of being purely insolvent, has simply vanished. In such cases, although the company is still validly registered, no financial statements have been filed for years, there are no signs of activity at the companies premises and there is absolutely no trace of the director or any shareholder whom to speak so to claim to take the steps necessary to satisfy credits. This unfortunate situation is known as a “De-Facto Closure”.

Derivative Proceedings: the ultimate but comprehensive solution

It is an elementary principle of company law that Director´s acting in breach of their duties become liable to whom they due such duties, that is to the shareholders and to the company itself. Thus, strictly speaking, where a wrong has been done to a company by the directors -such us depriving it of any solvency- only the company or the shareholders can sue for any damage caused.

There are however some exceptions to this rule, permitting creditors to bring a derivative claim in cases such as the De-Facto Closure. A derivative claim, if certain requirements are met, will make the Directors directly liable to the creditors for every single debt of the company from the De-Facto Closure. Creditors therefore have a good, and last chance, to benefit directly from the proceedings, which are not limited by any amount whatsoever.

However, creditors intending to issue a derivative claim against company directors must make all possible haste to issue proceedings before any other creditor seeks the Court’s assistance in order to declare the creditor´s bankruptcy. Thenceforth, every creditor shall respect the principle par condition creditorum and no single derivative action might be issued