Precautionary Measures on Directors & Business Continuity

In judicial proceedings investigating the conduct of a company’s directors, it may be reasonable, and even necessary, to order interim measures to ensure the effectiveness of the investigation and safeguard the company’s assets. Where there are well-founded indications of a risk to the proceedings or to those assets, restricting the directors’ powers to act may be entirely justified.

What is not acceptable, neither from a legal perspective nor from a business point of view, is to agree to revoke the powers of the board of directors without providing for a simultaneous and effective handover. If this is done, the result is a power vacuum that brings the company’s day-to-day operations to a standstill: contracts are not signed, payments are not authorised, banks do not accept instructions, supplies are suspended and no one is able to make decisions regarding employees, customers or the authorities.

Spanish commercial law incorporates a rule of continuity designed precisely to prevent such a situation. Article 224 of the Companies Act stipulates that directors shall continue to hold office, even after their term of office has expired, until the new directors accept their posts. On the basis of this provision, the so-called principle of continuity of the board of directors has been developed in legal and registration practice, the purpose of which is precisely to prevent the company from being left without valid representation and, therefore, inoperable. The Directorate-General for Legal Security and Public Trust has repeatedly confirmed this interpretation, noting that not even the voluntary resignation of a sole director is registrable if it leaves the company without leadership, unless a general meeting is convened to fill the vacancy (Resolution of 6 March 2015 | BOE-A-2015-3020).

This rule is not merely a formalistic whim; it is a cornerstone of commercial law designed to safeguard legal certainty, stability and confidence in dealings with the company.

However, in the courts, particularly in the context of criminal investigations involving precautionary measures, a certain degree of tolerance has developed towards decisions that breach this unwritten principle.

Applied to the field of criminal investigations, the premise is clear: a precautionary measure must be technical, proportionate and reversible. Its purpose must always be to preserve the effectiveness of the proceedings; under no circumstances should it serve to impose a penalty in advance. If a judge’s decision to revoke the powers of an administrative body under investigation is enforced without waiting for the judicial administrator or the person designated to assume those functions to accept the post at that very moment or immediately thereafter, a power vacuum arises; the company is left legally and operationally paralysed, which contradicts the very rationale of the precautionary measure itself.

In practice, the damage can be immediate and severe, leading to a disruption in cash flow, breaches of contract, reputational damage and, in the most extreme cases, avoidable insolvency proceedings.

If the measure adopted causes greater harm than the risk it is intended to avert, this constitutes a clear excess which cannot be justified on the grounds of either good faith or urgency; for, precisely because they are exceptional measures, such decisions require the utmost precision and rigour in their implementation.

It is also worth bearing in mind that investigations do not always target ‘criminal organisations’. Often, these are genuine companies, with payrolls, contracts and ongoing commitments. Disbanding their board of directors not only ensures the investigation proceeds, but may also dismantle the company, harm third parties not involved in the proceedings and, paradoxically, may even make it more difficult for the company itself to fulfil its obligations and responsibilities.

One might well ask what happens when, as a direct consequence of a poorly executed precautionary measure, the company suffers significant financial loss or is driven into insolvency. The State’s financial liability for the malfunctioning of the administration of justice is an extraordinary remedy, but not a purely theoretical one. When an interim order is issued without due regard for proportionality or operational foresight, a claim for damages ceases to be an academic hypothesis and becomes a real possibility, provided that specific damages and the causal link arising from the poorly implemented measure can be proven.

Where there are reasonable grounds for suspicion, judicial intervention must be firm and timely, whilst always ensuring business continuity and the proportionality of the measures for the duration of the proceedings. Revocation without a replacement is not merely a procedural formality; it is a measure that jeopardises a company’s viability and, with it, jobs, investments and contractual commitments.

The firmness of justice is not at odds with due process and proportionality. Removing the company’s ‘keys’ from the board of directors under investigation may be prudent or advisable, but failing to provide a copy at the same time to the person who must from that moment on steer and oversee the running of the company is like leaving the vehicle running, on a slope, with no one at the wheel.

Article published in VozPópuli