Is the administrator who is unaware of the injury that his or her actions generate responsible?

Index

1. Duties of the Director
2. Duty of care
3. Duty of loyalty
4. Special duties
5. Civil liability of directors
6. How far does the subjective scope of directors’ responsibility extend?
7. Joint and several liability of directors
8. Exemptions from liability under section 237 LSC
9. Ignorance of the injurious act as an excuse for the director’s responsibility
10. Conclusions

Duties of the director

There are two duties that the law imposes on directors: (1) the duty to act with diligence and (2) the duty of loyalty to the company.

Duty of diligence

The duty of care determines that the manager must act as an orderly businessman. It has a double configuration, as a guideline of conduct and as a source and obligation. This generic duty is specified in four specific duties:

• Duty to effectively exercise the office: when a director is appointed he is expected to actively exercise his office. This activity must be demonstrated both in management matters and in the promotion of other matters, such as the convening of a AGM.
• Duty of supervision: the director must monitor the company on an ongoing basis. This supervision must extend both to the company’s bodies and to the persons to whom they delegate the functions.
• Duty to be informed: This duty is both a right and an obligation. Directors have the right to receive and the obligation to demand the necessary information to carry out their duties. Information is essential for managing a company, regardless of how the corporate administration is organized. But fulfilling this duty is more complicated if the company is managed through a BoD. Each and every one of its members must be diligent and collect sufficient information for the specific corporate action.
• Duty to protect the company’s discretion: The last duty here is to promote and maintain discretion in corporate decision-making. Social management is far from being an exact science. It is not easy to determine when a decision has been detrimental or not to society. That is why directors’ decisions must have a wide margin for discretion. Directors are not obliged to accept their position in order to achieve economic success for the company. They are only obliged to comply with the law, the Articles of Association and the other duties of the office. Thus, Spanish regulations have been inspired by US case law to determine whether a decision is diligent. The rule known as the “Business Judgement Rule” establishes these requirements for a decision by the directors to be considered diligent:
  • Decision taken in good faith;
  • Without personal interest in the matter; and
  • Following an appropriate procedure

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When does the prescription period of Directors´ liability elapse?

Liability actions against directors are in any case prescribed after 4 years. Thus, both social and individual actions, as well as liability for debts, will have the same limitation period. The difference lies in the dies a quo.

Duty of loyalty

The duty of loyalty, on the other hand, requires that the director should always exercise his office in the interests of the company. Thus, the director is expected to perform his duties as a faithful representative would. The link between this duty and the interests of the company explains why directors are accountable to the AGM. Since the corporate interest is determined by the shareholders, it is the AGM that approves the management of the directors.

The duty of loyalty is specified in the following obligations:

• To exercise the office as a faithful representative, under their responsibility, with freedom and independence.
• Not to carry out functions other than those for which they have been empowered.
• Not to disseminate information about the company. This obligation operates even after the director has ceased to be a director.
• Not to participate in acts or decisions that involve a conflict of interest with the company.

Special duties

The LSC also imposes two further special duties on the directors, which are:

• The duty to promote the dissolution of the company in the event of entering into one of the legal causes of dissolution; and
• The duty to apply for insolvency proceedings in the event of the insolvency budget of the company being administered.

Civil liability of directors

A director, in the exercise of his or her office, may incur multiple responsibilities. Thus, it can be criminal, administrative, civil. Let’s focus here on the director’s civil liability.

Article 236 of the LSC states that directors are liable for their acts or omissions that are harmful to the company’s interests. These interests include those of the company, but also those of the partners and third party creditors. Therefore, the liability will be before these three subjects linked to the company. In this way, two areas of responsibility of the directors can be distinguished:

• Internal liability: to the company and the partners.
• External liability: to the company’s creditors.

In order for this responsibility to operate, the acts or omissions must be contrary to:

• The law;
• The statutes; or
• The duties inherent to the position of director.

In addition, fraud or guilt must be involved in the director’s harmful action or omission.

Presuppositions of the responsibility of the Directors

As a result of the above, the following budgets can be established for an director to incur liability:

• Act or omission of the director;
• Contrary to the law, the Articles of Association or the duties of his office;
• That the act or omission causes real and economically assessable damage;
• That in the director’s actions there is intent or negligence; and
• That there is a causal relationship between the director’s actions and the damage caused.

How far does the subjective scope of the directors’ liability extend?

Any person who performs the functions of a director is subject to its liability regime. Thus, both the directors appointed for this purpose and those who exercise the functions without express appointment will be liable. In other words, the law extends liability to de facto directors, and not only to de jure directors.

Thus, a director by right is understood to be one who is registered in the Commercial Register as a director. De facto directors, on the other hand, are those who do not appear as directors, but act as such.

With regard to legal persons, it should be noted that it is perfectly valid for a legal person to be listed as a company director. Now, it is necessary to qualify the liability regime in these cases. The legal entity director must appoint a natural person to represent it. This natural person must meet the requirements established by law for directors. In this way, he will have to comply with the same duties and obligations as the rest of the directors. Therefore, the responsibility in these cases will be joint and several between the legal entity and the natural person that represents it. Thus, both the legal entity and the natural person may be held liable. There is no exoneration for the natural person when he claims to have followed the instructions of his principal.

Joint and several liability of the directors

If the administration of a society is plural, the prevailing regime of responsibility is that of solidarity. This is determined by article 237 LSC. In other words, liability is extended to all the members of the administrative body. When there is damage, the injured party may exercise the action of liability against any director. And the latter will be obliged to compensate for the damage in full. Without prejudice to the fact that, once the damage has been compensated, the director can repeat the action against the other directors. Power contained in article 1145 CC.

Exemptions from liability in article 237 LSC

Once the previous point is clear, the same article exempts certain circumstances that exempt the director from liability. Thus, a director will not be responsible for the harmful act when they prove that:

– He did not intervene in its adoption and execution;

– He was unaware of the existence of the act; or

– Knowing it, he did everything necessary to avoid it or, at least, he expressly opposed it.

Let us see how the exemption of ignorance of the harmful act is developed.

Ignorance of the harmful act as an exoneration of the director’s responsibility

As mentioned above, the law imposes a duty of care on directors. One of the manifestations of this duty is the duty to demand adequate information for the fulfillment of their obligations (Article 225.3 LSC). Another, more specific, manifestation is the obligation to attend meetings of the BoD.

It is clear that a director’s inaction in gathering corporate information does not exempt him from liability. This is what the DGRN states in its Resolution of 7 October 2013, regarding non-attendance at AGM. When does the exemption of ignorance of the harmful act come into play?

The STS 271/2002 of 15 March 2002 is instructive on this point. This decision rejects an appeal for infringement of the second paragraph of the repealed 133 LSA. This paragraph, now included in the current article 237 LSC, regulated the non scope of solidarity to the directors who were unaware of the harmful act. The High Court’s argument for dismissal is the lack of evidence of this ignorance. Thus, it points out that the exoneration operates for specific acts in which the director proves his lack of knowledge.

Therefore, the key that determines if the lack of knowledge is an exonerating circumstance is the proof of it by the director. However, the Court points out that this capacity to prove cannot be used to allege absolute ignorance of the company. Directors must have general knowledge of the company. The circumstance exempting from ignorance may only refer to a specific act.

Conclusions

As you can see, the director’s responsibility, despite being regulated in a few articles, is full of nuances. What obligations directors have or what their subjective scope is is not clear from reading the LSC. It is necessary to refer to case law.

One of these nuances is whether or not the circumstances exempting them under article 237 LSC are operative. These exemptions include the director’s lack of knowledge of the harmful act. This circumstance can be used as a catch-all for the directors to remain unharmed. Both the LSC and the jurisprudence determine that the lack of knowledge of the act will only be exempt when it is totally proven. Furthermore, ignorance must be limited to a specific act. It cannot be argued that there is absolute ignorance of the company’s circumstances.

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