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Director and parent company liability

Liability

Under what circumstances can a director or parent company be held liable for a company’s insolvency?

As a matter of principle, a director or a shareholder may be held liable if he or she has performed one of the following actions which led to the company’s insolvency:

  • using the company’s goods or credits for his or her own benefit or for the benefit of another person;
  • engaging in the production, trade or provision of services for his or her personal benefit in the company’s name;
  • ordering the continuation of an activity that led the company to cease payments for personal benefit;
  • keeping a fictitious account, making accounting documents disappear or failing to keep accounts in accordance with the law;
  • hijacking or concealing company assets or fictitiously increasing its liabilities;
  • using ruinous methods to procure funds for the company in order to delay the cessation of payments;
  • in the month preceding the cessation of payments, paying or ordering the payment of a creditor with a preference to the detriment of other creditors; and
  • intentionally committing any other act which contributed to the company's insolvency.

Defences

What defences are available to a liable director or parent company?

In general, the most efficient defence is to prove that none of the aforementioned actions (which are expressly included in Law 85/2014 on preventing insolvency and insolvency proceedings) have been performed, or that there is no direct link between the director or shareholder’s actions and the company becoming insolvent – in other words, to prove that the company’s insolvency is due to objective economic reasons beyond the fault of the directors or shareholders.

Due diligence

What due diligence should be conducted to limit liability?

The directors and shareholders must take the appropriate actions to limit the company’s exposure to the cessation of payments as far as possible. Such actions may also imply the commencement of proceedings (eg, the ad hoc mandate or the preventive concordat) intended to reach an agreement with creditors and avoid insolvency.

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