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Cristina Paredes gives an in-depth insight into the challenges of the 21st Century for Boards of Directors

Cristina Paredes took part in a new session of the Focused Program entitled “Board of Directors: liability and challenges”, a legal analysis of the liability of administrators and directors with respect to their commercial companies.

Tuesday, 3 de April, 2018

In the throes of globalization, there can be no doubt that having standard criteria in relation to liability, establishing a protocol of legal predictability of the legislation applicable to certain conducts, and achieving supranational proceedings similar to cassation with a global scope must be the future challenges in relation to commercial matters and, as such, with respect to the liability of administrators and directors.

A Professor of Commercial Law, Cristina Paredes has worked as a researcher at Harvard Law School. She currently combines here professional activity as a lawyer with her role as a researcher and lecturer at EAE Business School on cross-disciplinary legal courses on programs such as the Executive MBA, Executive Development Program, Human Resources, Journalism and Marketing.

Based on the knowledge of the role of the administrator, as an individual responsible for representing the company that they direct or run, the session inter-referenced the various legal texts that we must know in order to rigorously comply with the legal system that applies to director liability, in view of the fact that the “legal framework is extensive and complex, with several regulations involved, as well as multiple legal amendments”.

Within the range of different legal aspects that come into play in the broad concept of director liability, civil liability was the main focus of Cristina Paredes’s presentation, which a distinct concept from administrative, tax or criminal liability, or any other type of liability, to which directors may be subject in view of their running of the company.

From this perspective, “administrators will be liable if they fail to fulfil their duties and this causes direct damage to the company, indirectly affecting the shareholders or third parties, or directly damaging their interests”.

“Using the duties that directors have as a starting point, we can identify whether they really bear liability”. There are two fundamental categories in terms of duties: diligence and loyalty. The legal treatment of these duties is complex from a legislative perspective.

The duty of diligence is established in the law as conduct guidelines and a source of obligations. Administrators must perform their role with the diligence of an “orderly businessperson”. Moreover, the duty of diligence is not established in an abstract way, regardless of the concurrent circumstances, but rather the features of the administered company are taken into account: the structure of the administrative board and the position that the administrators within the structure, and the functions assigned to the administrative board of the company that they run.

The company may be managed by an administrative board with a range of structures (sole administrator, joint and several administrators, Board of Directors). “When assessing enforceable diligence, this structure must always be taken into consideration, as it plays a significant role in determining the way in which the duties of the position have to be exercised”, added Dr. Paredes.

Meanwhile, the duty of loyalty requires directors to perform their duties in the best interests of the company at all times. As such, they must perform their roles with the diligence of a loyal representative, being under obligation to act in good faith and strive to exercise their duties in the way that most benefits the company that they manage, including crucial aspects such as the duty to avoid conflicts of interest and the exemption and authorization structure.

Cristina Paredes went on to give an in-depth analysis of the regime of administrator liability, covering the possible nature of such liability (legal, organic and personal, joint and restitutive), and the legal bases and parties responsible, with a particular emphasis on figures of special significance in her work as a lawyer, such as the ‘de facto’ administrator and the representative of the administrative legal person. To finish, the Professor of Commercial Law analysed the effects of civil liability and the difference between the scope and attribution of liability, outlining the dismissal of administrators.

With respect to liability claims, Cristina Paredes explained that “the civil liability of administrators can be enforced through two types of claim: corporate liability claims and/or individual liability claims. In either case, to take a lodge liability claim, the administrators must have failed to fulfil their obligations and have caused damage to the company”.

Alongside the general legislation, the expert shared a more in-depth insight into special cases of liability, which may arise when the requirements stipulated in the legislation are not met in the case of “company dissolution or insolvency”.

Cristina Paredes also distinguished between administrator liability and director liability. “Administrators and directors hold different positions and perform different duties in the organization of a company. These differences in terms of position and functions also lead to differences in terms of the legal liability requirements”. Moreover, “the administrator has an organic commercial relation, while the director is related to the company by an employment contract, which means that the administrator has powers to manage the company and represent it with respect to third parties, while the director is hierarchically answerable to the administrative board, so their position does not have powers to represent the company, without prejudice to the powers that they may be assigned”.

With respect to measures to prevent liability and defence against liability claims, Cristina Paredes explained that “at a general level, unless the liability circumstances stipulated in the general civil liability legislation occur, administrators cannot be required to bear liability”.

Within this complex panorama and with plenty of specific circumstances in practice, Cristina Paredes brought her presentation to a close by posing some interesting challenges for the future. The Professor of Commercial Law, who lectures at the Madrid Campus of EAE Business School, is confident that the future will be full of opportunities for commercial law, based on three reasons: globalization, codes of conduct and, specifically, general codes of good corporate governance. “We have to be able to resolve conflicts by applying increasingly universal principles, able to resolve the conflicts that arise all over the planet and not just at a short-sighted national level, with a trend towards more uniform regulations and enhanced predictability with respect to the legality of the parties’ conduct, and achieving supranational proceedings similar to cassation with a global scope”.

Cristina Paredes emphasized the importance of “ethics, morals, value and principles when inspiring legal conducts and regulations”. In fact, “the regulations and codes of ethics are an expression of the new culture of social, business, trade and company relations and corporate governance”, she concluded.

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