6 things you should know before becoming the legal administrator of an S.L.

Accepting the role of legal administrator of a limited liability company (S.L.) in Spain gives you almost unlimited power in the company, however, it also carries serious obligations and responsibilities that you must be aware of.

If you don’t protect yourself properly, you can put in danger your personal assets and have unpleasant surprises.

The idea that the responsibility linked to an S.L. is limited to its social capital is incorrect.

1. Legal framework

The Spanish Capital Companies Act, Legislative Royal Decree 1/2010, establishes that any commercial company incorporated in Spain (whether self-employed, limited or anonymous) must have a management body in order to deal with third parties relations (contracts, customers, suppliers, etc.) as well as internal affairs (workers, partners, etc.). This body can be made of a sole administrator, several joint administrators or a board of directors. In the case of an S.L., the most common form is that of a sole administrator.

2. Functions and competence of sole administrators

The role of a sole administrator is to represent and manage the day-to-day of the company, and, therefore, act on its behalf to make transfers, investments, acquisitions, and any other initiative that the society adopts.

It is a public role. That means that the appointment shall be made public, in front of a notary, who then publishes it in the Official Journal of the Mercantile Registry.

It is an indefinite position with no end date, unless otherwise stipulated in the bylaws. However, it may be terminated at any time by the partners, if they have a majority vote. You can also resign.

In case of cessation, it is important to make the termination also public by going to the notary again and having the change be registered at the Official Journal of the Mercantile Registry.

In general, being the administrator of the company has unlimited privileges (unless stipulated in the company bylaws), but you must also consider that the administrator responds to the partners and creditors in case of problems. If the partners or creditors prove that an important error was caused by your mistake or omission, that would mean that you didn’t “act diligently” and therefore it is you who should pay.

3. What does it mean to act diligently?

In the above paragraph, we said “act diligently”, and that is really the heart of the matter. If you didn’t act diligently then you are responsible for the error. Hence, it is important to understand what acting diligently means.

The law requires in its article 225 that the administrator shall act with the “diligence of an orderly businessman and a loyal representative”. That is:

  • Fulfill your position as a loyal representative in defense of the social interest, understood as the interest of society, fulfilling the duties imposed by law and bylaws.
  • You shall not take advantage of your position to carry out operations or business for your own benefit.
  • You shall inform the partners of any conflicting situation which may be related to the interests of the company.
  • You shall not work or take a job in the same, analogous or complementary activity that constitutes the corporate purpose, unless expressly authorized by the company.
  • You must keep all company information confidential during your role as administrator and after.

As mentioned, the day-to-day tasks of an administrator include convening meetings, keeping accounts, ordering transfers, authorizing payments, and so on. Generally, if you comply scrupulously with your obligations, nothing untoward will happen.

The problem is that normally the administrator is also the managing director of the company and thus has a lot of things on his plate and can miss important things. That is why you need to be very well backed up legally so you are protected in case serious errors or omissions occur. We recommend being advised by a specialized lawyers office like AvaLaw.

4. Examples of negligence of an administrator

Below are four examples of an administrator not acting diligently:

  • He didn’t keep the accounts according to the Commercial Code rules.
  • He signed a promissory note knowing that there were no funds to pay.
  • He avoided or delayed the solicitation of insolvency proceedings.
  • He hid assets of the company.

5. Protect your personal assets

When someone is appointed sole administrator, he should assume that he will be the one responding with his present and future assets in case of problems. So before taking the position, you should protect your personal and family assets by putting them in the name of another person. It is important that you don’t wait too long to do this, if you wait until there are problems you could be charged with asset stripping.

In small companies, although one of the partners is the administrator the rest of partners also are involved in the business and make decisions. In these cases agreements are usually signed, for which the rest of the partners commit themselves to assuming the debts in equal parts. Although it is a document that does not have validity against third parties it does have relevance internally and is accepted by the Civil Code.

Another option, although expensive, is to contract a Directors & Officers Liability Insurance. These type of insurance gives protection against the responsibility of the administrators who have caused damage to third parties or can’t pay their debt due to not having acted diligently.

6. De facto administrator

According to Supreme Court Sentence 59/2007, of January 26, a de facto administrator or “in fact” administrator or shadow administrator is a person who does not formally have the status of administrator of the company but exercises powers of decision. It is the person who, in fact, manages or co-manages the company, even though formally the administrator is someone else. The matter is determined on an objective basis and irrespective of the person’s motivation or belief. A de facto administrator is subject to the same duties and liabilities as a de “de jure” administrator or “administrator in law”.

If you have questions or want additional information don’t hesitate to contact AvaLaw at +34 932 553 107.