The role of a company director carries significant responsibilities and obligations. Although in many cases this role may go unnoticed when the company is performing well, it is in times of crisis that the true scope of the responsibility assumed by directors is tested. In this article, we will analyze what happens if things go wrong and how directors can face potential lawsuits from shareholders or creditors.
Legal Obligations of Directors
A company director has the duty to manage the company diligently, in the interest of the company and its shareholders. This duty translates into several obligations, such as:
Duty of Care: Directors must act with the same level of diligence expected of a prudent businessman with the necessary information. Perfection is not required, but they must act in an informed and reasonable manner when making decisions.
Duty of Loyalty: This means that directors must always act in the best interest of the company and its shareholders, avoiding conflicts of interest or benefiting personally at the expense of the company.
Liability for Company Debts: Directors can be held liable for the company’s debts if they fail to meet their obligations correctly, especially if they do not take necessary actions when the company enters into insolvency.
Regulatory Compliance: Directors must ensure the company complies with all applicable regulations, from labor law to tax and environmental regulations. Non-compliance with these regulations can result in penalties and fines, and directors can be held liable if negligence or bad faith is proven.
What Happens If Things Go Wrong?
When a company faces economic difficulties, the actions of the directors are crucial. If directors do not make the right decisions or fail to act in time, they could face lawsuits from both shareholders and creditors.
Shareholder Liability Claims: Shareholders can sue directors if they believe that decisions harmful to the company have been made or if directors have acted disloyally. Liability claims are often based on mismanagement or decision-making that does not align with the company's best interests.
Creditor Lawsuits: In situations of insolvency, creditors have the right to claim liability if they believe that directors have not acted diligently. In such cases, directors can be held personally liable for the company's debts, especially if they did not request the company’s dissolution when the situation required it.
Insolvency Liability
One of the most delicate scenarios for directors is when the company enters insolvency proceedings. In this situation, directors must act with extreme caution. The law requires that when a company is unable to regularly meet its payment obligations, directors must request voluntary insolvency proceedings. Failure to do so can result in insolvency liability, meaning directors could be held responsible for the company’s debts.
If it is proven that the directors intentionally or negligently worsened the company’s insolvency situation, they can be disqualified from holding director positions in other companies and be forced to assume the company’s debts.
How to Avoid Lawsuits and Protect Yourself?
To minimize risks and avoid liability, directors must act proactively and diligently at all times. Below are some key recommendations:
Acting Informed: It is essential that directors make decisions based on the best available information and appropriate advice. This will help demonstrate that they acted with due diligence, even in difficult situations.
Maintaining Good Communication with Shareholders: Transparency is key to avoiding conflicts with shareholders. Informing them of the company’s actual situation and justifying the decisions made can help prevent liability lawsuits.
Requesting Insolvency Proceedings on Time: In cases of insolvency, it is crucial that directors do not wait too long to act. Requesting voluntary insolvency in time can prevent creditors from suing them for worsening the situation.
Having a Good Legal and Financial Team: Having expert advisors is essential to ensure that all decisions are made within the legal framework and to minimize liability risks.
Conclusion
The role of a company director carries significant responsibilities, especially evident in times of crisis. Acting with diligence, fulfilling legal obligations, and maintaining clear communication with shareholders and creditors are key to avoiding legal problems and protecting oneself from potential lawsuits.
At Dr. Frühbeck Abogados, we have a team of specialists in commercial law who can advise directors on fulfilling their obligations and the best way to manage crisis situations. If you are concerned about your liability as a director, don’t hesitate to contact us.