Unlike the partners or shareholders (ie, stakeholders) of a company – who limit their financial liability when forming a company to the value of their investment – directors, managers and administrators (ie, executives) are generally liable and may be forced to use their personal assets to compensate for negligent actions. This liability may be effected by stakeholders and, in certain cases, third parties. The general liability of executives does not imply that they must cover the company's obligations with their personal assets; rather, they are liable to the company and its stakeholders for damages caused by their negligent behaviour.
In certain cases the law provides for objective liability under which an obligation must be met. Failure to fulfil this obligation means that the individual in a managerial position could be jointly and severally liable to the company or its stakeholders from his or her personal assets. For third-party liability, specific cases exist in which the executive may be liable for the company's obligations.
Executives are subject to legal liability for negligence to the company and its stakeholders under general rules – that is, they have the liability of an attorney to its principal. The standard of liability is ordinary negligence. If an executive acts negligently, he or she is responsible to the company for the damages that it incurs.
A clear example of when an executive is responsible for one or more company obligations is where he or she exceeds his or her entrusted powers and responsibilities. In this case an executive can be found liable for contracted obligations simply for exceeding his or her authority.
The Corporations Act (Law 18,046) establishes the general principle that directors are personally liable (jointly and severally) for damages caused by negligent or intentional actions. The law prohibits bylaws to limit such liability. However, as the board of directors is a collective body, a director may oppose a decision that would be detrimental to the company's interests.(1) A director can protect his or her liability in this case, provided that his or her opposition to the harmful resolution has been acknowledged in the minutes of meeting. There are cases in which the law presumes the negligence of directors and a number of other provisions that apply this principle to specific issues relating to the administration of a company, such as obligations concerning:
- corporate records;
- payment of capital contributions;
- distribution of interim dividends; and
- insolvency situations in which knowledge (and therefore liability) of directors and officers is presumed.
In addition, there are exceptional provisions with wide practical applications that make managers and administrators indirectly responsible for the obligations of the company that they manage. One example is the law on payment of social security contributions. This liability is indirect because it is not financial (thus, a creditor cannot pursue payment from the personal assets of the executive). However, there is the possibility of applying personal constraints (eg, arrest for up to 15 days, which can be renewed) or even potential criminal liability to representatives of companies for the non-payment of social security contributions.
The Tax Code contains a similar rule. Penalties (eg, imprisonment) and constraints (eg, arrest) are applied to those persons who must fulfil tax obligations. In the case of legal entities, these penalties apply to managers and administrators.
For further information on this topic please contact Santiago Montt Vicuña at Montt y Cia SA by telephone (+56 22 233 8266) or email (firstname.lastname@example.org). The Montt y Cia SA website can be accessed at www.monttcia.cl.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.