Liability of Company Directors in Spain
Serving as a director of a Spanish SME is not just “running the business”. As soon as cash-flow pressure, margin compression, refinancings, or payment delays to suppliers appear, the role becomes a function with real legal risk and personal asset exposure. Spain’s insolvency reform (Law 16/2022) has reinforced a core idea: the system does not wait for bankruptcy; it pushes companies to act earlier and to do so in an orderly manner, using preventive tools and meeting a higher standard of diligence.
The thesis of this article on directors’ liability is simple: today, insolvency is a continuum, not a binary state. And that changes everything—when you must react, which measures you should activate, which mistakes are punished most severely and, above all, what you must document to avoid personal exposure.
What does Directors’ Liability mean?
There is no single type of liability. In a crisis, several fronts can be triggered simultaneously:
- Liability for debts (Article 367 LSC): the most “automatic” risk where a statutory ground for dissolution exists and no timely action is taken.
- Individual action (Article 241 LSC): a creditor claims against you for direct damage attributable to a specific conduct.
- Insolvency liability (classification and potential order to cover the shortfall): if the company enters formal insolvency proceedings and the conduct of the management body is examined.
- Tax and Social Security liability shift: proceedings by the Tax Authorities / Social Security Treasury to transfer the debt to the director.
- Criminal exposure: reserved for fraudulent conduct (not for a business that simply “goes wrong”).
The recurring pattern across most proceedings is the same: liability rarely arises from “making a mistake”, and much more often from acting too late, lacking sufficient information, or being unable to prove that you acted methodically.
Directors’ duties in distress: duty of care, duty of loyalty, and evidence
Duty of care: acting as a “prudent businessperson” (not as a bystander)
In a crisis, the duty of care translates into very specific obligations: cash monitoring, debt control, accounting oversight, risk review, and the ability (and willingness) to demand information. A director is not protected by saying “the CFO didn’t tell me”. If there is inadequate reporting, the criticism is often precisely that: the director should have required it.
For that reason, many SMEs reduce risk by rapidly professionalising the finance function: cash control, scenarios, reporting and analysis, internal control, decision discipline, and support for negotiations. If building a permanent in-house structure is not sensible, an External CFO model is often the most efficient way to reach the required standard without losing agility.
Business Judgment Rule: the safe harbour exists… but it is not free
Business discretion protects business decisions that turn out badly, provided there is good faith, no conflict of interest, an appropriate process, and sufficient information. In distress, the last requirement becomes decisive: continuing to operate and “holding on” may be defensible—but not based on intuition. You need a plan, scenarios, and consistency.
This is where an increasingly common tool in refinancings and restructurings comes in: the Independent Business Review (IBR), which provides an external assessment of viability and cash-generation capacity. When there is real stress, an IBR is not “paperwork”: it is a credibility instrument and, in addition, a highly valuable evidentiary defence if someone later challenges why a decision was taken.
Duty of loyalty: the “corporate interest” becomes more creditor-sensitive
As the company approaches insolvency, the corporate interest is no longer viewed solely through the lens of shareholders. The focus shifts towards preserving value and avoiding decisions that benefit shareholders (or related parties) to the detriment of creditors. In practice: in distress, “buying time” transactions that drain assets or prioritise particular interests are dangerous ground.
Diagnosing too late is the most expensive mistake: likely, imminent and actual insolvency
The insolvency reform strengthens a phased approach:
- Likely insolvency (up to 2 years): where it is objectively foreseeable that, without a plan, obligations will not be met in the next 24 months. Here there is not always a strict duty to file for insolvency, but there is a practical duty to react: assess viability, build scenarios, and explore preventive measures.
- Imminent insolvency (up to 3 months): stress is already urgent. Inaction at this stage is often difficult to justify.
- Actual insolvency (already): the company cannot regularly meet due and payable obligations. At this stage, legal duties with relevant deadlines and presumptions are triggered.
In addition, there is a point that is constantly confused in SMEs:
- Insolvency (cash test): you cannot pay what is due and payable.
- Grounds for dissolution (balance-sheet test): losses reduce net equity below half of the share capital (Article 363 LSC).
You may be in a dissolution ground and still be paying; or you may have assets and still be insolvent due to lack of liquidity. The law may require you to act on both tracks, and mixing the concepts is a common source of claims.
Article 367 LSC: liability for corporate debts
Directors’ liability for corporate debts (Article 367 LSC) is particularly damaging because its logic is straightforward: if a dissolution ground existed and the director did not react as the law requires, the director may become jointly and severally liable for certain corporate obligations. Three points are critical:
- The quasi-automatic nature of the risk: in many claims, the debate is not whether the business decision was good or bad, but whether there was a dissolution ground and whether statutory action was taken within the deadline.
- The documentation issue: when accounting is disorganised or annual accounts have not been filed, the defence becomes harder and the case often tilts towards the creditor.
- Tail risk: recent case law trends reinforce that this exposure can have a longer “tail” than many directors assume, forcing directors to take seriously both corporate governance milestones and D&O insurance (including its temporal coverage).
Individual action (Article 241 LSC): not every non-payment can be attributed to you
An individual action requires three elements: unlawful conduct, direct damage, and causation. Causation is the real battleground.
A typical scenario is a de facto closure (“pulling down the shutters” without dissolving the company or filing for insolvency). While this is poor practice, a compensatory judgment usually requires proof that the conduct worsened the harm—for example, that assets were lost or diverted, or that in an orderly process the creditor would have recovered something. For a diligent director, the defensive takeaway is clear: avoid disorder and leave an evidentiary trail of the company’s balance-sheet and cash reality.
Insolvency liability: classification and potential order to cover the insolvency shortfall
If the company enters insolvency proceedings, the classification phase examines whether there was intent or gross negligence in causing or worsening insolvency. Presumptions (accounting issues, delayed filing, lack of cooperation, inaccurate documentation) are especially relevant because, in practice, inertia is penalised.
An order to cover the insolvency deficit (the unpaid amount remaining after liquidation) is the greatest personal asset risk. Practically, a director reduces exposure if they can show that:
(i) they acted methodically,
(ii) they did not worsen insolvency through grossly negligent conduct, and
(iii) when the business was not viable, they chose an orderly exit.
Criminal exposure: the line is fraud, not failure
Criminal law enters when there is fraudulent conduct: concealment or destruction of assets, false accounting, simulated claims, transactions lacking economic rationale designed to strip assets, and similar behaviours. Non-payment as such is not punished; deceit or disloyalty is.
In distress, two rules protect more than they may seem: avoid related-party transactions without clear justification, and maintain accounting/supporting documentation with impeccable traceability.
The strategy that best protects directors: anticipation + professional restructuring + IBR
In a crisis, diligence must not only be exercised—it must be proven. That is why, in situations of real stress, the most robust approach usually involves three layers.
First, cash control: a 13-week cash forecast and scenarios over 12–24 months if early warning signs exist. Second, a viability plan with real levers (margin, working capital, CAPEX, sales, cost base), which in many cases requires a strategic restructuring because the problem is not only financial, but operational. Third, where risk is material or there are multiple creditors, an IBR adds technical credibility and strengthens Business Judgment Rule protection.
Once liabilities are under stress, the logical step is usually to structure and negotiate with creditors on the basis of a credible plan, not temporary patches. That is where a debt restructuring and refinancing process becomes appropriate.
And if continuing as an independent company is not reasonable, an orderly exit may preserve value and reduce conflict: in some cases, a distressed sale / Distressed M&A is preferable to a chaotic liquidation.
Finally, a very SME-specific point: many crises worsen because there is no strong finance function to impose discipline and make the business “manageable” under stress. If the team cannot absorb it internally, an External CFO model is often the fastest bridge back to control and data-driven decision-making.
FAQs – Frequently asked questions on Directors’ Liability
When does a director become liable with their personal assets?
When specific legal mechanisms are triggered (for example, Article 367 LSC due to inaction in the presence of dissolution grounds), or when a third party proves direct damage and causation (Article 241 LSC), or in insolvency proceedings if intent/gross negligence is found and an order to cover the insolvency deficit is imposed. The practical key is anticipation and documentation.
What is most dangerous about Article 367 LSC?
Its quasi-automatic logic: if dissolution grounds existed and no action was taken as required by law, liability can crystallise into joint and several liability for corporate debts. That is why it is critical to detect dissolution grounds in time, call a shareholders’ meeting when required, and not leave the company on “autopilot”.
Does an IBR help protect a director?
Yes, especially where decisions are sensitive (continuing to operate, seeking financing, negotiating with creditors). An IBR provides independent information on viability and cash, and helps demonstrate that the decision was taken on a technical basis, strengthening protection of business discretion.
Is it better to restructure or to file for insolvency?
It depends on genuine viability and the stage of insolvency. If the business is viable and there are levers, restructuring in time often preserves value. If there is no viability, delaying the inevitable usually increases risk and cost. In practice, the optimal approach is to assess quickly with data (cash and scenarios), decide, and execute in an orderly way.
Conclusion: liability of company directors is managed (not “endured”)
Directors’ liability today looks less like a “trap” and more like a professionalism test: monitor, decide with sufficient information, document, and activate restructuring tools in time. If you wait for non-payment, improvise, and leave no evidence, the system will penalise you.
At Maraz Corporate Finance we help management teams and shareholders turn uncertainty into a defensible plan: cash control, scenarios, financial narrative, creditor negotiations and, where appropriate, coordination of an IBR. And if the company needs to strengthen its finance function without adding permanent overhead, our Fractional CFO service allows you to professionalise decision-making quickly in critical moments.
Javier de Rojas Roca de Togores
Socio - Maraz Corporate Finance
