Derivative Action and Individual Liability Action: When Can a Director Be Held Personally Liable with Their Own Assets?

Many people assume that any poor business decision may give rise to liability for a company’s directors. However, corporate law distinguishes between different legal actions depending on who has actually suffered the damage.

The Spanish Companies Act (Ley de Sociedades de Capital) establishes two main avenues for claiming liability against directors: the corporate liability action and the individual liability action.

Although both seek to remedy damages caused by actions that are contrary to the law, the company’s bylaws, or the duties inherent to the position, they differ significantly regarding the injured party, who is entitled to bring the claim, and who ultimately receives any compensation awarded.

Understanding these differences is essential for shareholders, directors, creditors, and third parties dealing with a company.

What is a Corporate Liability Action?

The purpose of a corporate liability action is to protect the company’s assets against negligent conduct or breaches of directors’ duties.

In these cases, the damage is suffered directly by the company itself and only indirectly affects shareholders or creditors.

For this reason, if the claim is successful, the compensation awarded becomes part of the company’s assets.

Common Examples

• Sale of company assets below market value.
• Transactions carried out in situations involving conflicts of interest.
• Investments that are clearly detrimental to the company.
• Serious breaches of the duties of care or loyalty.

Who Can Bring a Corporate Liability Action?

Standing primarily belongs to the company itself through a resolution adopted by the shareholders’ meeting.

However, the Spanish Companies Act also allows the following parties to bring the action:

• Minority shareholders in certain circumstances.
• Creditors when the company’s assets are insufficient to satisfy their claims and the company has not initiated the action.

What is an Individual Liability Action?

An individual liability action directly protects shareholders or third parties when the damage caused by a director affects their own assets rather than the company’s assets.

In this case, the compensation is awarded directly to the injured party.

Common Examples

• Unjustifiably preventing the exercise of shareholder rights.
• Refusing to distribute dividends that have already been approved.
• Concealing relevant information from a creditor.
• Obtaining financing while concealing the company’s true financial situation.

 

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The Key Issue: Distinguishing Direct Damage from Indirect Damage

One of the issues that generates the greatest amount of litigation is the distinction between direct damage and indirect damage.

Direct Damage

Direct damage exists when the harm immediately affects the assets of a shareholder or third party. In these cases, an individual liability action may be brought.

Indirect Damage

Indirect damage occurs when the company initially suffers the damage and the consequences subsequently affect shareholders or creditors. For example:

• A decrease in the value of shareholdings.
• A reduction in the likelihood of recovering a debt due to the company’s financial deterioration.

In these situations, the appropriate remedy is usually a corporate liability action.

Is a Director Always Liable for the Company’s Debts?

No. The mere existence of an unpaid debt does not automatically make a director personally liable. Personal liability requires the fulfilment of specific legal and case-law requirements.

However, there are particularly sensitive situations, such as:

• Fraudulent conduct.
• Failure to initiate the company’s dissolution when legally required.
• De facto closure of the company without an orderly liquidation process.

In these scenarios, the director may incur personal liability.

Corporate Liability Action vs Individual Liability Action: Key Differences

Aspect	Corporate Liability Action	Individual Liability Action
Directly Injured Party	The company	Shareholder or third party
Purpose	To restore the company’s assets	To compensate the injured party
Who Brings the Action	The company, shareholders, or creditors in certain cases	The injured party
Recipient of the Compensation	The company	The claimant
Shareholders’ Resolution Required	Generally yes	No

Do You Have Questions About Directors’ Liability in Your Company?

Choosing between a corporate liability action and an individual liability action can be decisive to the success of a claim. Correctly identifying who has suffered the damage and selecting the appropriate legal avenue helps avoid procedural errors and increases the likelihood of recovering losses.

Our Corporate Law Team can help you assess each case and define the most appropriate strategy to protect the interests of the company, its shareholders, or its creditors.

Frequently Asked Questions

What is the difference between a corporate liability action and an individual liability action?

A corporate liability action protects the company when the damage affects its assets. An individual liability action directly protects shareholders or third parties who have suffered harm.

Can a shareholder sue a director directly?

Yes, but only when the shareholder has suffered direct and personal damage. If the harm actually affects the company, the appropriate remedy is a corporate liability action.

Can a creditor bring a claim against a director?

Yes, in certain circumstances provided for by law, particularly where there is unlawful conduct attributable to the director or liability for company debts.

When is a director personally liable with their own assets?

When they breach their legal or corporate duties and that breach causes damage to the company, its shareholders, or third parties.

What is indirect damage?

It is the harm suffered by shareholders or creditors as a consequence of prior damage caused to the company. In these cases, an individual liability action will generally not be appropriate.

Is a shareholders’ resolution required to bring a claim against a director?

For a corporate liability action, generally yes. For an individual liability action, no.

What is the limitation period for bringing a claim against a director?

Both corporate liability actions and individual liability actions are subject to a four-year limitation period from the date on which they could first have been exercised.