Liability of the director for the actions of the previous director

A new director of a company may be liable for damages caused by the actions of the previous director, as long as it has been established that the director has not acted with sufficient diligence.

The Provincial Court of Madrid, in Decision 307/2023 of 3 April, sentences the former director of a company to pay for damages caused to the company in excess of €4,500,000, in connection with a lease contract signed with a related company. Furthermore, the decision analyses the cases in which the new director could be jointly and severally liable, even though he did not hold the position in the company at the time the damage was caused, on the execution of the lease agreement.

The Provincial Court of Madrid bases its analysis of the new director’s on the duties of loyalty and care provided for in Articles 225 to 232 of the Capital Companies Act.

In this case, it is understood that the harmful act for the company is the execution of the lease contract, signed by the former administrator. The Provincial Court considers that the duty of care of the new director in such a situation cannot require additional actions such as filing a lawsuit for the nullity of the lease, causing additional costs to the company or without certainty as to the nature and complexity of the litigation. The new director cannot be convicted for the failure to resolve the past damaging conduct. However, his duty of care would be considered to have been breached with further actions, such as extending the lease during his term of office.

Read Sentencia 307/2023 Audiencia Provincial.