Bankruptcy in Spain (3): Directors’ Liability in bankruptcy proceedings

Spain has decreed several insolvency moratoriums for companies to avoid the destruction of its business tissue. The responsibility for correctly managing these deadlines and act diligently lies within the directors of the company.

Thus, the suspension of the duty to file for insolvency proceedings does not mean that there is no possibility of filing for insolvency proceedings, being sometimes the most convenient option.

However, the suspension of this legal duty has created false confidence in many directors, who believe that not filing for insolvency proceedings does not entail any consequence.

When the director cannot ignore the fact that the company is no longer viable, and although there is no legal duty to file for insolvency proceedings, it will be on him to evaluate and decide whether to file for insolvency proceedings.

This is mainly to ensure that the director’s worsening of the deficit does not subsequently result in a guilty insolvency classification. Because the guilty classification would not be applicable due to the director’s failure to comply with his duty to file for insolvency, but because of the generation and/or aggravation of the insolvency caused by willful intent or gross negligence on part of the directors.

In short, they would be in breach of their duty of diligence when, being aware of the company’s state of insolvency and its constant worsening, they would delay the filing for insolvency. That is when their negligent attitude could lead to a guilty classification of the insolvency proceeding.

The consequences for the directors of a guilty classification of the insolvency proceeding include:

  • Disqualification to administer third parties’ assets for two to fifteen years
  • The assumption of the so-called insolvency deficit: the directors will be liable for the claims not met within the framework of the winding-up of the insolvent company with their personal assets.

Recommendations to the directors

The purpose of the temporary measures adopted because of Covid-19 is:

  • The postponement of the duty to file for insolvency proceedings
  • Preferential treatment of voluntary insolvency proceedings over necessary insolvency proceedings, and
  • The possibility of amendments to insolvency agreements, refinancing agreements, and extrajudicial payment agreements to prevent companies with significant losses and short-term financing deficits because of exogenous circumstances, but with viable projects in the medium and long term, from being forced into an insolvency proceeding and being liquidated at moments of extreme economic uncertainty.

However, these measures carry the implicit risk that the postponement of these obligations could cause a worsening of insolvency. The Bank of Spain warns: the insolvency moratorium will lead to large numbers of zombie companies. This situation leads to a decrease in investment and employment growth while causing productivity losses and discouraging the entry of new companies.

In short, the managers and directors must carry out a series of measures to revitalise the company’s financial situation, but they should not rely only on the existing moratorium.

Whenever the viability of the company or the possibilities of fulfilling their obligations are in doubt, managers and directors should not wait until the end of the current insolvency moratorium to file for insolvency proceedings. Instead, they should adopt the pre-insolvency and insolvency mechanisms to prevent liquidation while minimizing the risk of liability.

Finally, it is advisable to consult on the suitability of any extraordinary corporate transaction carried out; it could be revoked if it damages the company’s assets.

This article is not considered legal advice

Saphira Mouzayek

Having graduated with a Law degree, Saphira Mouzayek’s practice areas are company law and business law. Working languages: Spanish, German and English. For any query Contact Saphira Mouzayek