I. Introduction

Creditors who suffer a default by the company with which they have agreed a supply or service have two main ways in Spanish law to claim from the company directors the damage caused to them by the fact that the company did not comply with its contractual obligations. We will normally be dealing with scenarios where the debtor company is close to insolvency or has been “de facto” liquidated (i.e., without following the procedure legally established for this purpose). For economy of language, from now on references to “company” must be understood both to limited liability companies (S.L.) (by far, the most frequent in traffic) and to public limited companies (S.A.).

In this post we extract the state of the art in Spanish law regarding this important issue, key for creditors to be able to see their claims satisfied. However, as we shall see, both paths face quite a number of practical difficulties.

II. The action of strict liability for not promoting the dissolution of the company

On the one hand, recourse can be made to the action provided for in article 367 of the Capital Companies Act (“LSC”), for not having taken the necessary steps to ensure the dissolution of the company when the latter is in legal cause for dissolution. There are several legal causes for dissolution (namely those listed in article 363 LSC) but for our purposes the most frequent – and the one that should concern the directors most– is the situation of “imbalance”, that is, when the losses cause the company’s net accounting assets to fall below half of the share capital.

Once the directors have been made aware of this “imbalance” (or should have been aware) they have a period of two months to convene a general meeting of shareholders to deal with this issue and agree on the dissolution of the company, being obliged to file for judicial dissolution if the resolution of the meeting is contrary or cannot be achieved (v.gr., for not reaching a sufficient majority).

If they fail to do so (i.e. if they allow the two-month period to elapse without adopting these measures) creditors may demand personal liability from them for debts arisen after this cause for dissolution occurred. This is, in short, what is established in article 367 LSC (the so-called liability for not promoting the dissolution of the company). We are facing a liability of an objective nature, not based on the fault or negligence of the director and, therefore, in principle has somewhat simpler evidentiary requirements.

Does the above imply that under Spanish law the directors are guarantors for the company’s debts vis-à-vis creditors? As a general rule the answer is negative (and this is an important principle, which the Supreme Court has had the chance to emphasize on many occasions). But the legal system indeed wants companies that are financially very weakened to be effectively dissolved and removed from the market, and it imposes this duty on the directors.

For reasons of space, we cannot enter here into the details and questions raised by this legal action (from when does the two-month period begin to run?; what is the limitation period for the action to claim against the director?; what impact does the fact that the annual accounts are not drawn up or deposited in the Commercial Registry have?; etc.), but these are issues that must be carefully taken into account when drafting a claim of this type.

Are things different if the company is insolvent?

Actually imbalance (in the terms set out above) and insolvency are different concepts, with somehow divergent effects. While imbalance is a purely accounting notion, insolvency is a “factual” aspect, which is faced when the company cannot regularly meet its enforceable obligations, regardless of what situation is reflected in the annual accounts. However, the truth is that both scenarios will very often meet (in the sense that the company which is in a situation of insolvency will most likely also be in “technical bankruptcy” or imbalance), although this does not necessarily have to be the case.

Be that as it may, when the director notices that the company cannot comply with its obligations in a regular manner, he or she must request the declaration of bankruptcy of the company within three months, without having to obtain authorization from the general meeting of shareholders. This is what Article 5 of the Consolidated Text of the Bankruptcy Law (TRLC) orders.

Moreover, if both situations occur simultaneously (imbalance and insolvency), the obligation to file for bankruptcy prevails, since it would be highlighting that it is not possible to pay all creditors and it is necessary to deploy the mechanisms to guarantee equal treatment between them (“pars conditio creditorum”). We will return to this later in this post.

III. Individual liability claim

Secondly, Spanish Law contemplates the possibility to sue company directors through an individual liability action (art. 241 LSC) and, in fact, many corporate creditors choose to make use of it instead of bringing forward the action of article 367 LSC that has just been described. And this for various reasons: sometimes because the unpaid obligation has arisen before the legal cause for dissolution exists; in others, simply, because the company continues to act in traffic and draw up accounts, and maybe these reflect no imbalance.

The first thing worth noting is that the individual liability claim is not of an objective nature, but purely subjective (i.e., based on fault), and requires much stricter evidentiary requirements than the action of article 367 LSC, requirements that many of these lawsuits fail to overcome. This is somehow logical, since otherwise we could end up making directors liable for the debts of the company they manage, a risk which the Supreme Court has pointed out on many occasions.

The individual liability action as a way of shifting debts from the company to the director is, therefore, a remedy of an extraordinary nature in Spanish law. The fundamental obstacle lies in the causal relationship. No one doubts that this director could eventually have entered into a contract with the creditor in a phase of many financial difficulties of the company (which, by the way, is not legally prohibited, unless there is a fraudulent intent: see STS of October 6, 2021), and that this debt has been unpaid by the company, which finally became insolvent or disappeared from traffic.

However, in order to pose responsibility on the director, the question to be answered is whether, by doing something different from what the director actually did, that specific creditor would have been able to collect all or part of his claim. Only if the answer is affirmative could the claim be upheld.

The courts are nevertheless aware of the enormous evidentiary difficulties involved in answering the previous question, so they are satisfied by requiring the plaintiff to provide an evidentiary principle or “argumentative effort”, which, if carried out by the latter, would shift the burden of proof to the defendant administrator. This is, in short, the approach that the Spanish Supreme Court has adopted so far regarding the individual action. In fact, the High Court has only agreed to uphold the individual action for liability under art. 241 LSC under “very exceptional and qualified circumstances” when a principle of proof can be provided that, if things had been done differently by the director, that creditor would have collected the amount owed to him by the company (STS de Plena 472/2016, of 13 July 2016, RJ\2016\3191).

IV. How does the company’s declaration of bankruptcy impact both legal actions?

i) Regarding the action of strict liability for not dissolving the company

Spanish insolvency law is very clear on the matter: once a company has been declared bankrupt by the commercial court, the possibility of bringing this action against the directors ceases (simply, the courts will not admit them) and the lawsuits that were already in motion in demand of such liability will be suspended (art. 136.1.2º and art. 139.1 TRLC). All this on the understanding that the opposite would allow those specific creditors in bankruptcy to collect their claim separately from the rest and would ultimately entail an infringement of the pars conditio creditorum rule that must govern the bankruptcy proceedings.

However, the fact that the company is declared bankrupt does not entail that the director will not have to answer for the debts under article 367 LSC; simply means that this cannot be claimed during the bankruptcy proceedings. When the bankruptcy is concluded, creditors could resume these claims on the condition that the bankruptcy had been declared while the company was already in a situation of imbalance and the corporate obligations at stake had arisen after the existence of the legal cause for dissolution.

Moreover, it should be borne in mind that the declaration of bankruptcy of the company interrupts the limitation period for these actions, a period that will be recalculated once the bankruptcy is concluded. This is a circumstance that must be taken into account, since, despite the fact that the director could have ceased to hold office due to the bankruptcy proceedings, it is still possible that such a claim could be brought against him for events that occurred before the declaration of bankruptcy itself. And this with absolute independence of whether the bankruptcy has been classified as fortuitous or culpable.

ii) Regarding the individual liability claim

Unlike the previous one, the individual liability action is neither affected nor suspended by the company being declared bankrupt. For this reason, the incentives that the creditor has to resort to this action of article 241 LSC and thus try to recover from the administrator what the company owes him (and which this latter will not be able to repay him because of the bankruptcy) are quite evident.

And this is not only because the individual liability action of article 241 LSC is, as we say, “immune” to the bankruptcy of the company but also because, unlike the corporate liability action (art. 236 LSC), the individual action is the only one that will provide the creditor with personal relief (whereas the social liability action would be aimed at rebuilding the corporate assets and not that of the affected creditor).

That said, how does the fact that the company has been declared bankrupt affect the director? It is certainly a question that has a full impact on the topic of this article, because if the company is indeed in a state of insolvency, this shows the impossibility of being able to meet all the credits, and this is precisely the situation for which the bankruptcy is designed. It falls in the director’s duties to file for the declaration of bankruptcy in a timely manner, so that would be the expected reaction of the administrator and there would be no “organic unlawfulness” in the conduct of the director (to quote the words of the Supreme Court) that could be blamed for.

Due to this reason, it is often pleaded by the plaintiff that the bankruptcy was filed for too late. In this regard, the courts consistently rule that the possible “delay in the application for bankruptcy reveals a situation of insolvency, so that the non-payment of the debt cannot be attributed to the delay itself but to the inability to meet the payment of all the debts. That is why the delay indicated cannot justify liability under article 241 LSC, not even in more serious cases in which a de facto closure has taken place. Where appropriate, possible fraud derived from the diversion of assets or the delay in applying for bankruptcy have a natural channel for their assessment and sanction, which is the bankruptcy classification” (SSAP Madrid of May 9 or July 22, 2024).

What can be said in the case of “de facto closures”? Is it alone a proof of a negligent conduct from the director that guarantees the success of the liability claim? In fact, and according to the existing case law on the matter, we do not believe that this can be said.

It cannot be denied that the director who, instead of going for an orderly liquidation, proceeds to the de facto closure of the company, acts in breach of a legal duty (enabling the dissolution and liquidation of the company, or requesting bankruptcy). However, this is not sufficient for the individual action for liability to succeed, since it will be necessary to provide the evidence of proof “that, if the correct dissolution and liquidation had been carried out, it would have been possible for the creditor to collect his credit, in whole or in part”.

A good example of this is provided by the Supreme Court Judgment of 5 November 2019, in which a de facto closure was followed by a declaration of bankruptcy, albeit two years later. In this regard, the High Court points out that in such cases “that causal relationship is so blurred that it is difficult to assess it. Even if it were shown that at the time of the closure there was a specific asset pending liquidation, with which the claimant’s claim could have been paid, the subsequent opening of the insolvency proceedings highlights the existence of other competing creditors, which makes it difficult to conclude that with that correct liquidation the claimant’s claim would necessarily have been paid. […].

Thus, when a de facto closure leads to bankruptcy, the concurrence of other creditors and the impossibility of satisfying all the claims with existing assets, makes it difficult to assess a causal relationship between the delay in filing for bankruptcy and the non-payment of the creditor who brings the individual action. Without prejudice to the repression, in the qualification venue, of the culpable or intentional actions of the administrator that had aggravated the insolvency in a period prior to the declaration of bankruptcy, through the diversion of assets or assets of the company”.

In short, as can be seen, the individual liability action, in accordance with Spanish case law, is a remedy that will only in a very exceptional way allow creditors to recover their unpaid claims by the company, not even when the directors neglect their duties to dissolve and liquidate the company in an orderly manner, or to request bankruptcy. Only through a lawsuit that is very attentive to the strict requirements imposed by the Supreme Court could satisfaction be obtained through this path.