Liability of a Director of a Limited Company: Everything You Need to Know
The liability of the director of a limited company in Spain is an issue of great importance for those who occupy this position in a company.
It is essential to know the obligations and duties one has as a director, as well as the consequences of not fulfilling these responsibilities. In addition, it is necessary to know how to protect oneself legally in case of any situation that may arise.
This article will address the different aspects related to the liability of the administrator of an SL in Spain, with the aim of providing valuable information for those who perform this role and for those interested in learning more about the subject. It will also discuss the importance of transparency and good management in this role.
What is the liability of the director of an SL?
The liability of the director of a limited liability company (SL) is a fundamental aspect in the management of this legal form of company.
It is often said that the company director can do whatever he or she wants, but there is a limit to everything.
The director of an SL has the obligation to take decisions and carry out actions that benefit the company and its shareholders.
This implies the fulfilment of a series of legal duties and obligations, such as the presentation of annual accounts, the convening of meetings, the adoption of resolutions and the protection of the interests of the shareholders.
In addition, the director must act diligently and transparently in his or her management, avoiding any conflict of interest. In case of non-compliance with these responsibilities, the director may face legal consequences, such as financial penalties or even the loss of limited liability.
It is therefore essential that directors inform themselves about their obligations and seek legal protection to ensure proper and responsible management.
The obligations and duties of a director in a limited company
The director of a limited liability company has a series of obligations and duties that must be fulfilled to ensure the proper functioning of the company:
- Firstly, he must act with loyalty and diligence in the performance of his duties, making decisions that benefit the company and not personal interests.
- He must also keep an up-to-date record of the company’s accounts and file annual financial statements with the Commercial Registry.
- In addition, he is responsible for convening and chairing shareholders’ meetings and adopting resolutions at them, as well as registering company resolutions with the Commercial Register.
- Finally, he or she must ensure that all tax, labour and legal obligations of the company are met.
It is important to note that failure to comply with these obligations can have serious consequences both for the company and for the director himself.
If you are a director, you must act diligently in complying with your company’s tax obligations; if you fail to do so and your company commits an infringement, you may incur joint and several or subsidiary liability!
Tax liability of the director
Joint and several or subsidiary liability
If you are a director, in certain cases you may be liable to the tax authorities for the tax debts of your company that have arisen as a result of infringements committed by your company.
This liability may be joint and several or subsidiary:
- In the case of joint and several liability, the tax authorities can take action against you at any time, without the need to first exhaust all avenues of collection against the company or to have declared the company’s prior insolvency.
- In the case of subsidiary liability, on the other hand, the tax authorities can only make a claim against you after having established the insolvency of the company and any other persons jointly and severally liable.
Infringements
In order for the tax authorities to hold you jointly and severally liable, it is sufficient for you to have acted negligently.
In the case of joint and several liability, on the other hand, the element of culpability required is higher, and the tax authorities must prove that you acted with intent comparable to that required in criminal law.
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Joint and several liability
Causers
You can be held jointly and severally liable if you have actively and directly participated in the commission of a tax offence attributable to your company, i.e. if you have collaborated in or caused the offence. It is not sufficient that he has been negligent or careless (as in the case of subsidiary liability).
Examples of joint and several liability
You may be considered to have been actively involved (and therefore jointly and severally liable) if your company participates in a scheme to avoid declaring VAT; or if, after having committed a tax offence, you carry out operations to empty your company of its assets; or if your company sells a property and you decide not to account for or declare the profit made.
Subsidiary liable persons
No direct liability
If your company commits a tax offence but you are not the direct perpetrator, your liability is only subsidiary liability.
Specifically, this can occur in the following cases:
- When you have not carried out the necessary acts within your responsibility to comply with the tax obligations.
- When you have consented to non-compliance on the part of your dependants.
- Or when you have adopted agreements that make the infringements possible.
Considerations.
In the event of subsidiary liability, please note that:
- The director who was the director at the time of the infringement will be held liable (it makes no difference who the director is when the liability proceedings are initiated).
- Proceedings against the administrator can only be initiated once all avenues of collection against the company have been exhausted and, therefore, once the Tax Authorities have declared the company and any joint and several liable parties have been declared bankrupt.
Bankruptcy
This declaration of insolvency is not conditional on the company being insolvent in the sense of going into insolvency proceedings.
It is sufficient that the tax authorities have taken reasonable and sufficient action to prove the absence of realisable assets.
The spanish tax authorities can declare the director jointly and severally liable if he has directly participated in a tax offence. If the director has not been directly involved, his liability can only be subsidiary.
Consequences of breaching the director's responsibilities
The consequences of breaching the director’s responsibilities in a limited company can be serious and have various legal repercussions.
Firstly, the director may face claims from the affected partners or shareholders, who may seek compensation for the damages caused.
In addition, if it is proven that the breach was intentional or negligent, the director could be held personally liable and have to assume the company’s debts out of his or her personal assets.
The tax authorities could impose financial penalties and even disqualify the director from holding similar positions in the future.
It is therefore essential that directors of a limited company are aware of their responsibilities and act diligently to avoid any type of non-compliance that could jeopardise their reputation and financial stability.
How to protect yourself legally as a director of a limited company
Being a director of a limited company carries certain legal risks. However, there are steps that can be taken to protect oneself legally.
Firstly, it is important that the director complies with all the obligations and duties established by law and the company’s articles of association.
In addition, it is recommended to take out liability insurance to cover possible claims.
Directors’ liability policy
For this reason, for some years now, insurance companies have been marketing policies that cover the civil liability that may be incurred by directors in the performance of their duties.
You should know that this type of policy covers the payment of possible compensation for damages caused involuntarily to third parties and which may be demanded from the administrator for having acted negligently.
In addition, they usually cover the lawyer’s and solicitor’s fees for legal proceedings in which the administrator is held liable, as well as other expenses related to the lawsuit (expert opinions, for example).
Insurance policy exclusions
On the other hand, what these policies will never cover, for example, are liabilities arising from fraudulent or fraudulent (i.e. intentional) actions of the administrator.
Therefore, taking out such a policy will not give you total “immunity”. Thus, if when placing an order the director already knows for sure that the company will not be able to pay for it, he will be committing a fraud that the insurance will not cover.
In any case, insurance is still advisable.
Another important measure is to be transparent and to document all decisions and actions taken as a director.
It is also advisable to take legal advice to ensure that you comply with all current regulations and avoid mistakes that could result in legal liabilities.
In short, protecting yourself legally as a director of a limited company means being diligent in fulfilling your obligations, having adequate safeguards in place and seeking legal advice when necessary.
The importance of transparency and good governance in the role of the trustee
Transparency and good governance are two fundamental aspects that must be considered by the directors of a limited company.
Transparency implies the obligation to inform shareholders and other stakeholders about the financial situation of the company, as well as any other relevant information that may affect its performance.
Good management refers to the director’s ability to make sound decisions that allow the company to grow and develop in a sustainable manner.
A transparent and well-managed manager is able to generate confidence in shareholders and the market in general, which can translate into greater business opportunities and a better competitive position.
It is therefore essential that directors of a limited company are committed to high standards of transparency and good governance, as this not only enables them to fulfil their legal responsibilities, but also to contribute to the success and growth of the company.
In summary, the responsibility of the director of a limited company is a fundamental aspect that should not be taken lightly.
Directors have a duty to fulfil their obligations and act in a transparent and accountable manner for the benefit of the company and its shareholders.
Failure to fulfil these responsibilities can have serious legal and financial consequences for both the director and the limited company.
It is therefore crucial that directors protect themselves legally and adopt good governance practices to avoid future problems.
However, it is important to reflect on how greater awareness and training on directors’ responsibilities can be promoted, both at company and educational levels.
Only through a deeper understanding of these responsibilities can we promote more ethical and responsible management in our companies and societies.
