Liability of Directors in a Context of Corporate Crisis

In periods of economic instability, the immediate concern of any manager is the survival of the company. However, it is common for situations to be neglected in which business risk becomes personal risk.

For this reason, it is essential to conduct continuous analysis to ensure that decisions taken in a crisis context do not later give rise to personal liability for directors.

Business Failure and the Limits of Risk

It is clear that business failure, by itself, does not imply liability. Risk is inherent to economic activity and management functions. However, there is a moment — not always evident — in which legitimate risk ceases to be a strategic decision and may instead constitute a breach of legal duties. This is precisely the moment that, in subsequent legal proceedings, is analysed by the courts.

Financial Indicators of Deterioration

To avoid situations of personal liability, directors must carefully assess the objective signs of financial deterioration that may arise, such as:

• Repeated non-compliance with tax or social security obligations;

• Persistent difficulties in paying suppliers and employees;

• Evident lack of liquidity;

• Absence of a viable and well-founded recovery plan.

High-Risk Management Decisions

When indicators of economic fragility such as these arise, decisions such as contracting new financing, assuming additional commitments or prolonging the company’s activity cease to be seen merely as strategic options and begin to be assessed in light of the duties of diligence, loyalty and creditor protection imposed on directors under commercial law.

Conduct That May Give Rise to Directors’ Liability

In this context, case law has revealed recurring patterns, with courts considering the following as potential situations giving rise to directors’ liability:

• Undue continuation of activity with worsening of liabilities;

• Selective payment of certain creditors to the detriment of others;

• Failure to provide relevant information to shareholders or investors;

• Assuming obligations without an objective and reasonable expectation of fulfilment.

At the centre of judicial analysis lies the same question: whether the director’s decision was informed, considered and taken in the interest of the company, or whether, instead, it represented imprudent management in the face of evident signs of financial collapse.

Consequences of Directors’ Personal Liability

Should the court conclude that directors bear personal liability, serious consequences may follow, such as the classification of the insolvency as culpable, personal liability for the company’s debts, disqualification from conducting business, as well as civil liability towards creditors, investors or third parties.

Essential Evidence in the Event of Legal Action

To avoid consequences such as these, it is crucial to have appropriate documentary evidence. In court, it will not suffice for a director to merely allege good faith or legitimate intent. To prove diligent management, minutes of meetings, financial reports, audit reports, external opinions, cash-flow projections and internal communications are indispensable.

In many cases, the weakness of the decision taken does not lie in its substance, but in the complete absence of documentation capable of demonstrating that it was duly analysed and justified in line with the company’s interests.

The Thin Line Between Business Risk and Personal Liability

In sum, directors’ liability does not arise from business failure, but from the breach of legal duties in a context of crisis.

In an increasingly demanding economic environment, prudent governance, structured record-keeping of decisions and timely legal advice cease to be mere formalities and become true instruments of personal protection.

The boundary between legitimate business risk and individual liability is rarely drawn at the moment the decision is made; it is defined in court based on the decisions taken during the crisis.

A preventive analysis of a company’s financial difficulties is crucial to mitigating future risks of personal liability.

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