Director’s liability for company debts: when to claim if the company does not pay

A common scenario in civil and commercial law, where director’s liability for company debts comes into play, arises when, after a creditor obtains a judgment against a company, the company has no assets with which to satisfy the debt.

A typical example: you provided a service or sold materials to a limited liability company, you were not paid, you won the case… but when you try to collect you find that the company is empty: no assets, no deposited accounts and, sometimes, not even any activity. If you are owed money and the debtor company «has nothing», this is relevant to you.

At that point, a natural question arises: is it possible, through any legal route, to claim this debt from the company’s director?

The answer is yes, but not in every case. Director’s liability for company debts is set out in Article 367 of the Spanish Companies Act (Ley de Sociedades de Capital, «LSC»), and has a clear, well-defined scope that is, above all, heavily conditioned by the moment at which the unpaid obligations and/or debts arise. Supreme Court Judgment No. 215/2020, of 1 June (ECLI:ES:TS:2020:1503) provides a very precise synthesis of this matter, which we set out below.

The director is not automatically liable for all company debts

It is worth starting by dispelling a common misconception: the director is not automatically liable for all the company’s debts when the company fails, since accepting this thesis would radically conflict with the separation of legal personality between the director and the company they manage.

The logic of the commercial law system is not to penalise business failure, but something quite different: to penalise the director’s inaction when the law requires them to dissolve a company that is running at a loss.

That duty to act arises when the company enters a ground for dissolution, in particular when losses reduce the net equity below half of the share capital (Article 363.1.e LSC).

In plain terms: when the company has lost more than half of what its shareholders contributed when it was formed. From that point, the law considers the company to be in difficulty and requires its directors to act.

The real problem: continuing to operate when a legal ground for dissolution exists

The key issue is therefore not that the company has debts, but that these three circumstances arise simultaneously:

• The company was already in a legal ground for dissolution; and
• The director did not initiate dissolution or insolvency proceedings; and
• Despite this, the company continued to operate in the market.

It is at that point that commercial law shifts its approach and makes the director a kind of guarantor towards creditors.

Supreme Court Judgment No. 215/2020 explains this clearly: when a ground for dissolution exists and the director fails to act, they become liable for subsequent company obligations, precisely for having allowed the company to continue contracting and operating without a sufficient asset base.

The director’s duty: convene the general meeting or file for insolvency

When a ground for dissolution arises, the director has a period of two months to convene the general meeting to resolve dissolution (or to remedy the cause) and, if the company is insolvent, to file for creditors’ insolvency proceedings (concurso de acreedores). Failing to act within that period is precisely what triggers their personal liability for subsequent company debts.

The temporal key: liability only extends to «subsequent» debts

Here lies the crux of the matter: the director is only liable for debts arising after the moment the ground for dissolution occurs.

This always requires carefully reconstructing three points in time:

• when the ground for dissolution arises;
• when the director acts (or fails to act); and
• when the specific debt arises.

Supreme Court Judgment No. 215/2020 insists on this point and adds a nuance that is highly relevant from a practical standpoint.

Successive performance contracts: each instalment is an independent debt

Successive performance contracts (contratos de tracto sucesivo) are those that generate periodic payments over time (a lease, a supply agreement, a service subscription fee) rather than a single one-off payment. This nuance is important when determining which debts may be claimed from the director.

In the case analysed by the Supreme Court (a lease agreement ending in possession proceedings for non-payment of rent), the debt does not arise once and for all at the moment the contract is signed, but is generated periodically.

The Supreme Court holds that in these cases there is not a single original obligation but multiple successive obligations, such that each instalment of rent as it falls due constitutes an independent debt.

The consequence is that, even if the contract predates the ground for dissolution, instalments falling due afterwards do give rise to the director’s liability, if those payments arose when the company was already in a legal ground for dissolution by reason of losses.

How the ground for dissolution is determined: net equity (and common mistakes)

Another relevant aspect of the judgment is the clarification on how to determine whether a ground for dissolution exists.

The Supreme Court corrects the Provincial Court (Audiencia Provincial) in this case for a fairly widespread error: adding liabilities to net equity when analysing the financial position.

The rule is clear: the only relevant parameter is net equity, since that is what Article 363.1.e LSC refers to, compared with share capital and without incorporating liabilities into that calculation.

This point is essential in practice, because many disputes revolve precisely around the correct (or incorrect) reading of the accounts.

The importance of annual accounts… and their absence

In this type of litigation there is one element that, while not substantive, is decisive in practice: the filing of annual accounts.

When accounts exist, they allow the company’s financial position to be reconstructed (with greater or lesser debate).

But when they do not exist or are not filed, the situation changes, since the director loses their main evidential tool and a presumption against them effectively comes into play.

Case law has consistently held that failure to file annual accounts makes it difficult or impossible to demonstrate that the company was not in a ground for dissolution, so that the burden of proof falls more heavily on the director. In other words, it will be for the director to prove that the company was financially sound, rather than for the creditor to prove the contrary.

From the creditor’s strategic perspective, this is a particularly valuable element, as it activates a kind of presumption that a ground for dissolution exists — which is precisely why the company is not filing those annual accounts at the Commercial Registry (Registro Mercantil).

The purpose of Article 367 LSC: protecting legal and commercial dealings

The liability under Article 367 LSC has a very specific purpose.

As the Supreme Court recalls in Judgment No. 215/2020, it is to prevent a company that has already lost its financial equilibrium from continuing to operate in the market, creating a false appearance of solvency towards third parties.

The director is not penalised for the failure of the business, but for something far more specific: having allowed that failure to be visited upon third parties without taking the measures required by law.

Conclusion: not an automatic action, but a highly effective one

From the creditor’s perspective, a liability action against the director is not automatic, but is extraordinarily effective when correctly framed.

And from the director’s perspective, the message is equally clear: the risk lies not in the company having losses, but in doing nothing when the law no longer allows matters to carry on as if nothing has happened.

Whether you are pursuing a claim as a creditor or seeking to protect your position as a director, instructing an insolvency lawyer in Madrid helps to frame the action correctly.

Frequently asked questions about director’s liability for company debts

How long do I have to claim the debt from the director?

The liability action for company debts is subject to a time limit; the majority of case law applies a limitation period of four years from the date on which the action could be brought. It is advisable to act without delay and to assess each case individually, as the start date for the limitation period is not always clear.

Is a de facto director also liable, or only the formally appointed director?

Both the de jure director (the registered director) and, where applicable, the de facto director are liable — that is, the person who actually manages the company even if they do not formally hold the position.

Is this joint and several liability?

Yes. The director is jointly and severally liable for company obligations arising after the ground for dissolution, meaning the creditor may pursue them for the full amount of the debt, without prejudice to any internal actions between directors.

What about debts that predate the ground for dissolution?

As a general rule, these fall outside the scope of this route: Article 367 LSC only covers obligations arising after the company incurred a ground for dissolution, subject to the nuance noted above regarding successive performance contracts.

Can the director avoid liability?

Yes, if they can show that they acted in time: by convening the general meeting to dissolve the company, by remedying the ground for dissolution, or by filing for insolvency proceedings within the prescribed period. Diligence is precisely what exonerates them.

Does this only apply to unpaid rent?

No. The case analysed by the Supreme Court involved a lease, but liability under Article 367 LSC applies to any subsequent company debt arising after the ground for dissolution: unpaid invoices, supply agreements, loans, and so on.