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Written By: Carlos Jiménez Borrás, Esq.

Piqué Abogados Asociados

Barcelona, Spain

The aim of this article is not to provide a detailed analysis of the applicable rules and case law on the topic generated by the Spanish courts, which is very extensive. Such an analysis would far exceed the scope of this article, which merely aims to provide a short, general, practical view that may be helpful in business and professional relations withSpain.

Obviously, liability only comes into play when someone acts as an administrator, i.e., when acting as a company body performing the functions of administrator.

The system used inSpainto enforce administrator liability has traditionally been based on culpability, though the introduction of certain cases of nearly objective liability has led some authors to speak of a new kind of professional liability.

The liability system is public and therefore any statutory resolutions that alter or modify it are considered null and void. Liability is joint and several, i.e., it applies to all members of the administrative body who perform a detrimental act or adopt a detrimental resolution. The law only relieves those administrators from liability who did not intervene in the adoption and execution of the resolution and who can either prove that they did not know of its existence or, if they were aware of it, did everything in their power to prevent damages or expressly opposed the adoption of the resolution. Blame is applied collectively to all those who adopt or execute a detrimental resolution.

InSpain, the job of administrator can be performed individually or by a Board of Directors. With regard to the individual, the liability of the sole administrator in the case of joint performance, either when acting jointly and severally or by common consent, is clear.

The following is worth highlighting due to its special nature and importance:

1. The Board of Directors and, more specifically, the Chair of the Board. Delegating powers does not relieve the delegating Board Members from liability for the culpable actions performed by the delegated parties. In general, delegated administrators must answer for any actions they take that are detrimental to the company. Administrators who are not delegated are usually charged with liability for illicit acts due to their failure to perform their duties of supervision and to intervene when necessary; otherwise, it could be understood that they did everything they could have to prevent damages. Moreover, the fact that delegated administrators were following the instructions of the delegating Board of Directors is not sufficient cause to exonerate them from liability.

2. Liability is applicable until the administrators’ dismissal or resignation is entered in the Mercantile Register, provided it is not considered fraudulent. If the situation causing damages occurs after the administrators are dismissed or resign from their positions and the dismissal or resignation was not entered in the Mercantile Register for reasons that cannot be attributed to the dismissed or resigning parties, it is clear that third parties cannot logically attempt to demand liability of someone who is not an administrator.

3. The real administrators, i.e., those who do not formally occupy a position in the company, but actually control and effectively govern the company instead of the administrators or exert decisive influence over them. In these cases, since the law was amended in 2003, it provides for the application of the same degree of liability, though the courts had confirmed liability in different decisions.

The following is of note regarding legal action:

Corporate Liability Action

Corporate action is actually a form of legal action for compensation when the damages caused by the administrators harm the company’s interests. Therefore, any compensation obtained is earmarked for company assets, not the shareholders.

The first requirement for taking this legal action is having the right to take such action. There are three parties that are entitled to take such action.

First - The company may take legal action by adopting a resolution by simple majority at any time. Statutory clauses that establish a different form of majority for adopting resolutions whose object is to take corporate liability action are prohibited. It is therefore not possible to establish a greater majority than the legal majority and, if such a majority is stipulated in the bylaws, it is considered inapplicable.

Second - The shareholders may take legal action after requesting that a General Meeting be held to adopt a resolution to take action and at least 5% of the subscribed share capital must be present. A minimum of 5% of the share capital can therefore act as plaintiffs, and can act jointly if the 5% does not rest with a single shareholder.

Anyone who was a shareholder when the detrimental act or omission took place or when the resolution was adopted to enforce accountability, but who loses the condition of shareholder due to an inter vivos transfer when the lawsuit is filed is not entitled to take action. This is not true in the case of a mortis causa transfer, given that the heirs are entitled to take legal action if the deceased party started taking preliminary legal action, such as by requesting that a General Meeting be called.

Third - The company creditors can take corporate liability action against the administrators when the company or the shareholders have not taken action, provided that company assets are insufficient to cover what is owed to creditors. It is a subsidiary action instead of a suit filed by the company or the shareholders. It is not necessary for insolvency to be declared by the court, though the debt must be mature, liquid and due.

For corporate and individual liability action to be successful, the following requirements are necessary: a culpable action or omission, the existence of damages and a causal link between the two.

Damages must be caused for action to be taken. Damages consist of what is caused when the administrators do not comply with their obligations, either as determined by law, the company bylaws or actions and behavior considered enforceable (due diligence).

The burden of providing proof of damages is on the creditor claiming compensation. “Damages” must be understood to mean the reduction in company assets and any unearned profit when the situation is compared to the hypothetical development of the company if the administrators’ behavior had been appropriate. It must therefore be established whether the damages are the direct, immediate result of the action or omission in question, i.e., whether there is a causal link between the action/omission and the damages caused. This criterion must be applied to determine the resulting damages (reduction in company assets) and the loss of profits (unearned profit).

It is not always easy in practice to determine the existence of a causal link, given that many actions taken by administrators that are not in compliance with their obligations do not result in any damages to the company. In other cases, administrators’ decisions may involve major costs to the company, but such actions form part of the sphere of the administrators’ freedom to make decisions.

Liability must arise as a consequence of actions that:

  1. Go against the law, basically but not exclusively the Capital Companies Act.
  2. Go against the company bylaws, though the obligation of observance only applies to valid and licit clauses and, therefore, failure to comply with clauses that are null and void does not give rise to a case of liability.
  3. Are performed without the due diligence that corresponds to the job position. Although the concept of “due diligence” may seem abstract, due diligence calls for professional behavior and a certain level of professional training to perform the job.

Individual Liability Action

The law also provides for the liability of administrators who directly harm the interests of shareholders or third parties. It is direct and primary action that shareholders and third parties are entitled to take to recover their own assets.

As with the previous case, a direct causal link is required between the administrator’s action or omission and the damages caused to the shareholder or third party, along with the attendant guilt or negligence. For the action to be successful, it is not necessary for a General Meeting to be called, a company resolution adopted or a minimum number of shareholders to agree.

Shareholders and third parties are entitled to take such action, regardless of whether or not they are creditors.

Direct detriment to the creditor’s interests must be proven. The damages must be estimable and specific proof of these damages to the creditor’s assets must be established. There must also be a direct connection between the administrator’s action or omission and the damages caused to the shareholder or creditor, in addition to the attendant and duly proven guilt or negligence.

There are many different cases in which this liability may arise: illicit company actions resulting from the performance of company activity, such as unfair competition, environmental damage, putting defective products on the market, and unlawful interference in shareholder relations with the company through such actions as unlawful redemption of shares and providing false information on balance sheets or reports.

In both corporate and individual liability action, the time bar for taking action is four years after the administrator’s dismissal or resignation.

Special Reference to the Responsibility of Promoting Company Liquidation or Filing for Bankruptcy

Besides the cases mentioned above, there are two other highly relevant cases of administrator liability that are in fact the ones that involve the most lawsuits. They arise when the company is in the legal process of liquidation or in a state of insolvency and the administrators do not take action to help move the situation forward. This failure to comply may lead to objective liability regarding the administrators who do not comply with their legal obligations, though this objectivity may be qualified in practice by the courts, which call for a claim of guilt or an aggravating factor or incident causing the effective damages.

The reasons for liquidating a company are defined in the law and can be summarized as follows: so-called voluntary reasons, based on shareholder wishes, and obligatory reasons, which include fulfilling the terms established in the bylaws, fulfilling the company object, the impossibility of achieving the company object, the corporate governance bodies’ inability to take action, and losses that reduce company assets to an amount less than half the share capital.

Two different situations should be distinguished when the company is liquidated by resolution of the General Meeting:

  • Liquidation agreed upon by the General Meeting without cause; in this case, the requirements of the attendant circumstances must be met, as well as the formal majorities established in the Capital Companies Act.
  • Necessary liquidation; when obligatory conditions are fulfilled, the administrators must call a General Meeting within a period of two months to adopt a suitable resolution on company liquidation. A shareholder may also request that the administrators call a General Meeting if the shareholder believes there is legitimate cause for liquidation.

Any interested party may request court-ordered liquidation, including the administrators. This entitlement arises when the requested General Meeting is not called, i.e., when the administrators do not attend to any shareholder’s request for a General Meeting within a period of two months. This kind of liquidation can also be called for when the requested General Meeting is called, but not held (e.g., due to a lack of quorum) or, finally, when the General Meeting is held, but the resolution adopted goes against liquidation. If the administrators do not comply with this obligation, they must respond jointly and severally to the company obligations that arise after the materialization of the legal reason for liquidation.

Moreover, regardless of whether or not liquidation criteria are applicable to each case if, in general, the company does not regularly comply with its obligations, i.e., if it lacks the means of payment and is insolvent, bankruptcy law will also come into play and the administrators will have to present the corresponding declaration of insolvency. The analysis of the need to apply for a creditors’ meeting or bankruptcy, as well as the legal steps and requirements, is the subject of another article, as this one only provides a general overview without going into specific details.

In summary, besides individual and social liability action, the three main cases of administrator liability are as follows:

  • Failure to comply with the obligation of calling a General Meeting
  • Failure to comply with the obligation of filing for court-ordered liquidation
  • Failure to comply with the obligation of filing for bankruptcy

Finally, the circumstances mentioned above may be mitigated or aggravated, depending on whether or not the courts play a moderating role, in light of the specific circumstances of the case, especially in periods of economic recession like the present one.

For more information about Pique Abogados Asociados, please visit www.pique-aa.com or the International Society of Primerus Law Firms.