When does the prescription period of Directors´ liability elapse?

When asking for Directors´ liability, it is essential to consider when such liability´s prescription period elapse. Against directors there are several ways of demanding this liability. Thus, a distinction can be made between liability for damages and liability for debts. And, within the first one, between corporate action or individual action for liability according to the plaintiff. In corporate action, the entitled plaintiff is the company, the General Meeting or the Bankruptcy Receivership, if any. In the individual action, it will be the partner, a creditor or a third party for personal damage.

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What is the prescription period for liability due to damages?

For all types of directors´ liability the prescription period is 4 years. However, the difference is in the dies a quo, the time by which it begins the count of such years. In the case of liability for damages (corporate and individual action), article 241 bis of Corporate Enterprises Act (CEA) will apply. This article establishes that the calculation of the time limit will start from the moment the action could be exercised.

This article was introduced by Law 31/2014 which amended the CEA. Thus, previously the prescription of the corporate and individual action for liability was governed by the Commercial Code (CoC). Specifically, Article 949 CoC. This established that the calculation of 4 years began with the removal of the directors. However, since December 24^th 2014, when the aforementioned law came into force, the legislator decided to change it. It decides that the theory of actio nata is applicable for the prescription of the directors´ liability for damages. This theory, in our law, is contained in article 1969 of the Civil Code. It defends that the prescription begins to count from the moment the corresponding action could be exercised.

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A Practical Guide to Directors Liability

The company’s director will be held responsible of the company's debts to the company’s owners and to its creditors. He must therefore respond with his personal assets for the company's debts.

What about the Directors’ liability for the Company’s debts?

As mentioned, the prescription period is the same, 4 years. The question of the dies a quo, in this case, is controversial. There are provincial rulings that consider that article 241 bis CEA should be applied to all cases of directors’ liability. However, other courts argue that, in this case, Article 949 CoC applies. There are two main reasons for this.  First, the difference in the basis of liability. In the case of liability for damages, the director caused direct damage to the company or a person.  In the case of liability for debts, the director did not fulfil a legal duty. This liability is regulated in section 367 CEA.  The unfulfilled legal duty is to convene the General Meeting to dissolve the company or to apply for bankruptcy. The second reason is the situation in the law of article 241 bis. This is included after dealing with corporate action and individual action for liability.

In the case of liability for debts, the prescription period begins to run from the time the director leaves office. However, this dismissal should be put into temporally context. For such termination to be effective against third parties in good faith, it must be entered in the Commercial Register. Once it is registered, it is presumed that those entitled to bring the action will be aware of it. However, there is another starting date for this prescription period for two different parties. With respect to third parties in bad faith and those who knew of the termination (e.g. a partner). For those the prescription period will begin from the termination date. Provided that such termination is effective. It is when, after the termination, the director does not continue to exercise functions as a de facto director. In case he did, the prescription period will begin once the de facto functions have finished.

Conclusions

A distinction is made between two dies a quo depending on the liability for damages or debts. In the case of damages, the calculation of prescription period will start from the moment the action could be exercised. In the case of liability for corporate debts, it will begin to run from the director´s dismissal. In the latter case, it is necessary to determine whether the plaintiff was a third party in good faith or not. Thus, the period will begin (depending on this question) from the date of registration or from the termination date itself.

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