Vol 3 (2006) - Issue 4

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Directors’ Liability under Spanish Insolvency Law (And How to Avoid It)

More than one year has passed since the new Spanish Insolvency Law (the ‘Insolvency Law’) entered into force in September 2004 and now it is possible to start having a case law approach to how it is going to be applied by the (also brand new) Commercial Courts.
One of the major concerns, and probably also one of its most controversial regulations, is related to directors’ liability. The new law was seriously threatening directors and managers who did not act in a diligent manner when a company had fallen into the concept of ‘insolvency’ according to what is considered as such under the Insolvency Law and, thus filed for an insolvency proceeding.
This is not the first law punishing such kinds of misbehaviour by directors. Company and commercial laws in several cases also punish the directors of a company for merely failing to adopt certain measures that the Law provides for when the company is in the state of dissolution. Such kinds of provisions, are fundamentally intended to force the withdrawal from the market of those businesses which are not in a position to fulfil their obligations and be profitable at the same time, or force them to reorganise, avoiding situations of unfair competition.
For this reason, the Insolvency Law in its final dispositions also modified the Company Law, granting to directors a double choice in a situation of crisis, (i) to ask for liquidation of the company or (ii) to file for insolvency. The Insolvency Law permits initiation of insolvency procedure not only when the insolvency is actual but also when it is imminent, being considered as such when the company foresees such insolvency.
Furthermore, even in the case of directors having been diligent in the presentation of the insolvency petition,if the judge deems them to be at fault – which is what will happen when directors have misrepresented or acted with serious fault in the management of the company – it is also possible to declare directors (and/or managers) responsible for all or part of the debts of the company.
One very relevant point of the Insolvency Law is the fact that such responsibility may affect not only those directors or managers appointed at such date, but also any others appointed during the previous two years and, more relevantly, it will affect not only appointed directors and managers but also the “de facto” managers.
This is a situation that can very directly affect managers from head office or affiliated companies in groups of companies where in many cases the decision makers are outsiders to the company.