Criminal liability of company directors, managers and proxies

Being a company director or attorney-in-fact involves making decisions and carrying out actions that entail risks and both criminal and civil liability, among others, for those who perform them. In this article, Vicente García Elías, expert employment lawyer and managing partner of the firm, analyses the risks and how to avoid them.

Who is considered the perpetrator of an offence in the business context?

Under our criminal law, the perpetrator of an offence is the person who commits the act regulated in the Criminal Code. However, in a business context, a manager or director may:

• Commit the criminal act directly.
• Give orders to carry out an action to subordinates which may result in the commission of an offence.

In this regard, Article 20 of the Criminal Code considers the following as perpetrators of a criminal offence:

• Those who commit the act themselves, jointly, or through another person used as an instrument.
• Those who induce another or others to carry it out.
• Those who cooperate in the execution of an act without which it would not have been carried out.

What is the criminal liability of a director, attorney-in-fact or executive?

Criminal liability involves the possibility of a penalty being imposed if an offence regulated in the Criminal Code is committed.

Specifically, Article 31 of the Criminal Code provides the following:

Anyone acting as a de facto or de jure administrator of a legal entity, or in the name or on behalf, whether legally or voluntarily, of another, shall be personally liable, even if they do not meet the conditions, qualities or relationships required for the offence in question, provided that such circumstances exist in the entity or person on whose behalf they act.

For example, if a director uses company funds for personal benefit, they may be committing the offence of misappropriation, which may give rise to criminal liability with penalties of imprisonment and fines depending on the circumstances.

Liability and risks of directors, attorneys-in-fact and executives

Within a company, there is a hierarchy that influences the assumption of liability. Let us examine the case of directors, attorneys-in-fact and executives:

Risks of being a company director

From a civil and corporate law perspective, the liability of directors is regulated in Articles 236 et seq. of the Companies Act. The main elements of this liability are as follows:

• They are liable to the company, shareholders and creditors for damage caused by acts or omissions contrary to the law or the articles of association, or performed in breach of their duties.
• This liability also extends to de facto directors.
• If there is a governing body (board of directors), all members involved in adopting the harmful decision are liable.

Tax liability

The General Tax Law establishes that company directors are secondarily liable for tax debts where they fail to comply with tax obligations.

Criminal liability

If a criminal offence defined in the Criminal Code is committed, liability may be attributed to the director.

Risks of being an attorney-in-fact of a company

Attorneys-in-fact of a company may be:

• General. In this case, a general power of attorney is granted through a notarial deed, giving broad authority to make decisions or represent the company. In some cases, a general attorney-in-fact is considered a “de facto” director.
• Specific. A specific power of attorney is also granted through a notarial deed and is usually limited to certain decisions or representation in specific acts, such as the purchase or sale of real estate. This type of authority expires after a set period or once the transaction for which it was granted has been completed.

Depending on the scope of the authority and the circumstances, the attorney-in-fact may incur various types of liability:

Civil liability.

Civil liability may arise if the attorney-in-fact makes a decision that causes harm to the company, for example, signing a contract that results in significant losses.

In such cases, they may be ordered to pay compensation for damages.

Criminal liability.

Criminal liability arises when an offence defined in the Criminal Code is committed, for example, if the attorney-in-fact falsifies a document and commits fraud. In such cases, liability may involve imprisonment or fines.

Risks of being a company executive

Let us consider an example: an executive in a company engaged in building construction needs to reduce costs, and the responsible executive decides to use lower-quality materials. This decision leads to a structural failure in one of the buildings and results in a claim by the property owners. In this case, the executive may have to assume various types of liability: civil and criminal, depending on the circumstances.

How can risks arising from the liability of directors, attorneys-in-fact and executives be avoided?

Various measures can be taken to avoid risks or reduce their consequences:

• Obtaining ongoing advice from lawyers specialising in corporate compliance for companies and directors.
• Implementing internal control measures to promote regulatory compliance (criminal compliance).
• Taking out a liability insurance policy for executives, directors or attorneys-in-fact. This type of insurance covers aspects such as:
  o Compensation for damages claimed.
  o Legal costs for lawyers and court representatives in judicial proceedings.
  o Administrative fines and penalties.

Frequently asked questions about the liability of directors, attorneys-in-fact and executives

We have reviewed the regulation of the liability of directors, attorneys-in-fact and executives, and the following questions may arise:

What consequences can criminal liability have for directors, attorneys-in-fact and executives?

They may vary: imprisonment depending on the offence committed and fines. Additionally, there may be ancillary penalties such as disqualification from holding office.

Can a director, attorney-in-fact or executive be liable with their personal assets?

Yes, they may be liable with their personal assets in cases of negligence or damage caused to the company or third parties.

Is a de facto director liable?

Yes, because as we have seen, they may effectively assume the same functions as a de jure director.

What are the most common offences for directors, attorneys-in-fact and executives?

Generally, cases often involve offences such as misappropriation, money laundering, offences against the Public Treasury or Social Security, or environmental offences.

How can risks for a director, attorney-in-fact or executive be avoided?

The best way to avoid risks is by implementing a compliance system within the company and acting with the utmost diligence, supported by advice from lawyers specialising in executives.

What happens if there is a board of directors?

The company’s management structure may take the form of a board of directors. If the act causing damage is adopted by the board, all members may be held liable.

Undoubtedly, the best way to reduce the risks arising from criminal liability for these professionals is to have ongoing legal advice from a legal team capable of assessing potential risks and providing defence in the event of a claim.

At our law firms in Madrid, we have lawyers specialising in the defence of executives and directors, both in criminal and employment law.