Serving as a director of a Spanish SME is not just \u201crunning the business\u201d. 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<\/strong>. Spain\u2019s 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.<\/p>\n The thesis of this article on directors\u2019 liability is simple: today, insolvency is a continuum, not a binary state. And that changes everything\u2014when 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.<\/p>\n There is no single type of liability. In a crisis, several fronts can be triggered simultaneously:<\/p>\n The recurring pattern across most proceedings is the same: liability rarely arises from \u201cmaking a mistake\u201d, and much more often from acting too late, lacking sufficient information, or being unable to prove that you acted methodically.<\/p>\n 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 \u201cthe CFO didn\u2019t tell me\u201d. If there is inadequate reporting, the criticism is often precisely that: the director should have required it.<\/strong><\/p>\n 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<\/strong> model is often the most efficient way to reach the required standard without losing agility.<\/p>\n Business discretion protects business decisions that turn out badly, provided there is good faith, no conflict of interest, an appropriate process, and sufficient information<\/strong>. In distress, the last requirement becomes decisive: continuing to operate and \u201cholding on\u201d may be defensible\u2014but not based on intuition. You need a plan, scenarios, and consistency.<\/p>\n This is where an increasingly common tool in refinancings and restructurings comes in: the Independent Business Review (IBR)<\/strong>, which provides an external assessment of viability and cash-generation capacity. When there is real stress, an IBR is not \u201cpaperwork\u201d: it is a credibility instrument and, in addition, a highly valuable evidentiary defence if someone later challenges why a decision was taken.<\/strong><\/p>\n 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, \u201cbuying time\u201d transactions that drain assets or prioritise particular interests are dangerous ground.<\/p>\n The insolvency reform strengthens a phased approach:<\/p>\n In addition, there is a point that is constantly confused in SMEs:<\/p>\n 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.<\/p>\n Directors\u2019 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<\/strong> for certain corporate obligations. Three points are critical:<\/p>\n An individual action requires three elements: unlawful conduct, direct damage, and causation. Causation is the real battleground.<\/strong><\/p>\n A typical scenario is a de facto closure (\u201cpulling down the shutters\u201d 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\u2014for 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\u2019s balance-sheet and cash reality.<\/p>\n 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.<\/p>\n 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:<\/strong><\/p>\n (i) they acted methodically, Tax Authorities and Social Security are particularly sensitive because they have powerful tools and because, where there is a disorderly closure, proceedings are easy to trigger. Recent case law lines reinforce a very useful idea: shifting liability should not be automatic; it must be reasoned and supported by proof of specific culpable\/negligent conduct.<\/p>\n In plain terms: your defensive position improves materially if you can produce a \u201cdiligence file\u201d: cash control, genuine restructuring attempts, reasoned decisions, and documentation. Without that, the process becomes far more uncomfortable.<\/p>\n 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.<\/p>\n 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.<\/p>\n In a crisis, diligence must not only be exercised\u2014it must be proven. That is why, in situations of real stress, the most robust approach usually involves three layers.<\/p>\n First, cash control<\/strong>: a 13-week cash forecast and scenarios over 12\u201324 months if early warning signs exist. Second, a viability plan<\/strong> with real levers (margin, working capital, CAPEX, sales, cost base), which in many cases requires a strategic restructuring<\/strong> because the problem is not only financial, but operational. Third, where risk is material or there are multiple creditors, an IBR<\/strong> adds technical credibility and strengthens Business Judgment Rule protection.<\/p>\n 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.<\/p>\n 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<\/strong> is preferable to a chaotic liquidation.<\/p>\n Finally, a very SME-specific point: many crises worsen because there is no strong finance function to impose discipline and make the business \u201cmanageable\u201d under stress. If the team cannot absorb it internally, an External CFO<\/strong> model is often the fastest bridge back to control and data-driven decision-making.<\/p>\n 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.<\/p>\n 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\u2019 meeting when required, and not leave the company on \u201cautopilot\u201d.<\/p>\n 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.<\/p>\n 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.<\/p>\n Directors\u2019 liability today looks less like a \u201ctrap\u201d 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.<\/p>\n 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<\/strong><\/a> allows you to professionalise decision-making quickly in critical moments.<\/p>\nWhat does Directors\u2019 Liability mean?<\/h2>\n
\n
Directors\u2019 duties in distress: duty of care, duty of loyalty, and evidence<\/h2>\n
Duty of care: acting as a \u201cprudent businessperson\u201d (not as a bystander)<\/h3>\n
Business Judgment Rule: the safe harbour exists\u2026 but it is not free<\/h3>\n
Duty of loyalty: the \u201ccorporate interest\u201d becomes more creditor-sensitive<\/h3>\n
Diagnosing too late is the most expensive mistake: likely, imminent and actual insolvency<\/h2>\n
\n
\n
Article 367 LSC: liability for corporate debts<\/h2>\n
\n
Individual action (Article 241 LSC): not every non-payment can be attributed to you<\/h2>\n
Insolvency liability: classification and potential order to cover the insolvency shortfall<\/h2>\n
(ii) they did not worsen insolvency through grossly negligent conduct, and
(iii) when the business was not viable, they chose an orderly exit.<\/p>\nTax and Social Security liability shift: less automatism, more defence (if there is evidence)<\/h2>\n
Criminal exposure: the line is fraud, not failure<\/h2>\n
The strategy that best protects directors: anticipation + professional restructuring + IBR<\/h2>\n
FAQs \u2013 Frequently asked questions on Directors\u2019 Liability<\/h2>\n
When does a director become liable with their personal assets?<\/h3>\n
What is most dangerous about Article 367 LSC?<\/h3>\n
Does an IBR help protect a director?<\/h3>\n
Is it better to restructure or to file for insolvency?<\/h3>\n
Conclusion: liability of company directors is managed (not \u201cendured\u201d)<\/h2>\n