Liability of Directors and Officers Under Colombian Corporate Law
Managing a company in Colombia involves more than making commercial and operational decisions. Individuals who perform management or administrative functions may be held personally liable, including with their own assets, for losses caused to the company, its shareholders or partners, or third parties when they breach their legal or statutory duties.
This liability may arise, among other circumstances, when a director or officer acts intentionally or negligently, fails to comply with applicable laws or the company's bylaws, participates in a transaction despite having a conflict of interest, improperly uses privileged or confidential information, or engages in activities that compete with the company.
For this reason, Colombia's corporate liability regime is relevant not only to legal representatives, board members, and liquidators, but also to shareholders and partners who need to establish appropriate corporate governance and oversight mechanisms.
Who Is Considered a Director or Officer Under Colombian Law?
First, it is important to determine who qualifies as a director or officer under Colombian law, since a person is not considered an administrator merely because of the title stated in their employment contract or position description.
Whether a person qualifies as an administrator depends primarily on the position they hold, the functions they perform, and the extent of their involvement in managing or directing the company.
Under Colombian law, this category includes, among others:
The principal legal representative and their alternates.
The liquidator during the dissolution and liquidation process.
Members of the board of directors.
The manager or director of a commercial establishment.
Persons who, under the company's bylaws, perform administrative or management functions.
In the case of alternate legal representatives, liability generally arises when they actually assume and perform the functions of the principal representative due to the latter's temporary or permanent absence.
A company may also appoint a legal entity to serve as its administrator. In such cases, liability may extend to the legal entity holding the position and to the individual who acts as its legal representative.
De Facto Administrators in Simplified Stock Companies (S.A.S.)
In addition, Colombian law recognizes the concept of de facto administrators in Simplified Stock Companies (Sociedades por Acciones Simplificadas or S.A.S.). These are natural or legal persons who, without formally holding an administrative position, effectively participate in the management, administration, or direction of the company.
Under Article 27 of Law 1258 of 2008, in conjunction with the provisions of Law 222 of 1995, de facto administrators may be subject to the same liability and sanctions applicable to formally appointed administrators.
In other words, a person may assume the responsibilities associated with a director or officer without having been formally appointed to the position. If that person effectively intervenes in the company's management, direction, or decision-making, they may be subject to the same liability regime that applies to a formally appointed administrator.
Principal Duties of Directors and Officers
Directors and officers must base their decisions on three fundamental principles:
Act in good faith.
Act with loyalty.
Perform their duties with the diligence expected of a prudent businessperson.
Acting in good faith requires directors and officers to act honestly and with integrity, while complying with the company's operational and legal requirements rather than limiting themselves to the formal aspects of their functions.
The duty of loyalty, on the other hand, requires directors and officers to act honestly and in the best interests of the company. The company's interests must prevail over the personal interests of its shareholders or partners when those interests come into conflict.
In addition to these general principles, Colombian law imposes specific duties on directors and officers, including ensuring the proper development of the company's corporate purpose, complying with the legal and statutory provisions applicable to the company, and providing complete and timely information to facilitate the work of the statutory auditor.
In practice, however, certain duties require particular attention:
The Duty of Care of a Prudent Businessperson
This professional standard requires directors and officers to perform their duties with the level of judgment, expertise, diligence, and care that a prudent businessperson would exercise when managing their own business affairs.
Far from being an abstract guideline, this standard has significant implications for directors' and officers' liability. It requires them to act actively, carefully, and on the basis of adequate information, taking into account the specific circumstances of each situation.
In practice, this may include:
Being properly informed before making significant decisions.
Assessing the risks associated with important contracts and transactions.
Seeking specialized advice when the complexity of the matter warrants it.
Supervising the implementation of decisions that have been made.
Implementing reasonable controls to prevent fraud.
Protecting the company's assets.
Ensuring that financial and accounting information is reliable.
Accordingly, a director or officer cannot simply approve or make decisions automatically. They must first assess the relevant information, the risks involved, and the potential consequences of their actions, taking into account the specific circumstances of the matter.
Prohibition on Misuse of Privileged Information
Privileged information refers to confidential information to which directors and officers have access because of their position, profession, or functions, and which, by its nature, could generate an unjustified economic advantage or benefit.
For information to fall within this category, it must be capable of being used to obtain such an advantage and must relate to specific facts concerning the company or its competitive environment.
Misuse of privileged information may include:
Disclosing it to unauthorized third parties.
Using it for personal benefit.
Using it to benefit family members or third parties.
Withholding it to the detriment of the company.
Improperly disseminating it.
Any conduct intended to provide privileged information to persons who are not entitled to receive it, conceal it to the detriment of the company, use it for personal or third-party benefit, or disclose it at an inappropriate time may constitute a breach of this duty.
Importantly, these prohibited acts may give rise to the director's or officer's liability regardless of whether the conduct ultimately resulted in an actual benefit.
Prohibition on Competing with the Company
Colombian corporate law generally prohibits directors and officers from engaging, directly or through an intermediary, in activities that compete with the company unless they have obtained the express authorization of the company's highest corporate body.
Activities may constitute competition when an individual operates in the same geographic market and carries out economic activities that are identical or similar to those of the company, or that are of interest to the company. Competition may also arise when a director or officer takes for themselves a business opportunity that was reasonably within the company's reach and technical capacity.
It is important to note that the legal prohibition on competing is objective. Accordingly, the director's or officer's participation in a competing activity may be sufficient to constitute a breach, regardless of whether the competition involved unfair or restrictive business practices.
What Should a Director Do in the Event of a Conflict of Interest?
As with competing activities, conflict-of-interest rules are intended to prevent situations in which a director's or officer's personal interests may interfere with the interests of the company.
However, while a competing activity involves the director or officer participating in an activity that competes with the company, a conflict of interest arises when the individual's direct or indirect personal interests may affect their impartiality when making a decision on behalf of the company.
For example, a conflict of interest may arise when:
The director or officer intends to enter into a contract directly with the company.
The transaction benefits their spouse or close family members.
The decision benefits a company in which the director or officer has a financial interest.
The director or officer obtains a personal benefit as a result of a decision they are required to make on behalf of the company.
The practical rule is straightforward: when a potential conflict of interest exists, the director or officer should not simply make the decision and attempt to justify it afterward.
Instead, they must refrain from participating in the decision and disclose the situation to those authorized to convene the company's highest corporate body, so that the transaction can be properly evaluated and, where applicable, expressly authorized.
As part of this process, the director or officer must provide the information necessary for the shareholders or partners to properly assess the transaction, its implications, and its potential impact on the company.
The Special Regime for S.A.S. Companies
Given their flexible structure, Article 38 of Law 1258 of 2008 provides that certain prohibitions and restrictions established by the Colombian Commercial Code for other types of companies do not apply to Simplified Stock Companies (S.A.S.), unless the bylaws expressly provide otherwise.
Under the S.A.S. regime, certain restrictions are therefore eliminated, including restrictions on representing shares owned by others at shareholders' meetings, voting on year-end financial statements, serving simultaneously on more than five boards of directors, and trading the company's shares without authorization.
This does not mean, however, that directors and legal representatives of an S.A.S. have unlimited powers. On the contrary, the flexibility of the S.A.S. structure allows shareholders to establish rules that define and limit the discretion of directors and officers.
In this regard, the company's bylaws can play a particularly important role in defining, among other matters:
Limits on the powers of the legal representative.
Transactions requiring prior authorization.
Internal control mechanisms.
Restrictions relating to conflicts of interest.
Approval requirements for significant transactions.
This flexibility allows the company's corporate governance structure to be tailored to its specific needs. However, it can also create risks when the bylaws are drafted too broadly or fail to establish appropriate controls.
When shareholders do not establish clear limits on the powers of management, the legal representative may have a broad scope of authority. For this reason, the bylaws should be carefully reviewed as a tool for preventing legal and corporate risks and protecting the company's investment, particularly where there are multiple shareholders or potentially conflicting interests.
Consequences of Failure to Comply with Directors’ Duties
Failure to comply with legal or statutory duties can give rise to financial, corporate, and administrative consequences for directors and officers. These consequences may directly affect their personal assets and, in certain cases, affect the validity of acts carried out in breach of their duties.
The main consequences include:
Joint and Unlimited Liability: Directors and officers may be held personally liable, with their own assets, for damages caused to the company, its shareholders or partners, or third parties as a result of intentional or negligent conduct. The law presumes the director's or officer's fault when they fail to perform their duties, exceed the scope of their authority, or violate the law or the company's bylaws.
Action for Social Responsibility: The company's highest corporate body may decide, with the favorable vote of at least half plus one of the shares or quotas represented at the meeting, to initiate the corresponding legal action against the director or officer to obtain compensation for damages caused to the company. Approval of this action also results in the removal of the director or officer from their position.
Absolute Nullity of Certain Acts: Acts or contracts entered into by a director or officer in breach of the rules applicable to conflicts of interest or competition with the company may be subject to absolute nullity. This may result in the parties being required to restore the situation to its previous state, without prejudice to the rights of third parties acting in good faith.
Administrative Sanctions: In companies subject to inspection, supervision, or control by the Superintendence of Companies, the authority may conduct administrative investigations and impose the sanctions provided by law, including, where applicable, the removal of directors or officers who have committed violations.
Ineffectiveness of Exoneration Clauses: Any provision in the company's bylaws that seeks to waive or limit in advance the legal liability of directors or officers will be deemed unwritten and therefore have no legal effect.
Conclusion
The liability of directors and officers in Colombia is not limited to the consequences of a bad business decision. Failure to comply with the duties of good faith, loyalty, and diligence, as well as the obligations established by law and the company's bylaws, can result in consequences that directly affect their personal assets and the company's legal position.
For this reason, prevention is particularly important when making decisions that may involve conflicts of interest, related-party transactions, competition with the company, the use of confidential or privileged information, or transactions with significant economic implications.
In these cases, conducting a prior analysis of the legal risks and properly documenting the decision-making process allows directors and officers to act with greater diligence and reduce their exposure to liability.
For shareholders and partners, prevention also means having properly structured bylaws, clearly defined limits on the powers of directors and officers, and effective mechanisms for overseeing their management.
Frequently Asked Questions About Directors’ and Officers’ Liability
What Should a Director or Officer Do If They Have Doubts About Whether a Transaction Involves a Conflict of Interest?
Doubt about the existence of a conflict of interest or a competing activity does not relieve a director or officer of their corporate duties.
In accordance with the guidance issued by the Superintendence of Companies, in a situation of this nature, the director or officer must refrain from participating in the transaction and bring the matter to the attention of those authorized to convene the company’s highest corporate body.
When the director or officer has the authority to do so, they may directly convene the shareholders’ meeting so that it can evaluate the transaction and expressly decide whether to authorize it.
Is an Alternate Legal Representative Liable Even If They Have Never Assumed the Position?
Not necessarily. The liability of an alternate legal representative depends on whether they have actually exercised the functions of the position. If, despite not being formally appointed to act in place of the principal representative, they regularly intervene in the management or administration of the company, they could be considered a de facto administrator and be held personally liable for actions carried out in that capacity.
Does a Bad Business Decision Automatically Create Personal Liability for a Director or Officer?
No. An adverse business outcome does not, by itself, result in personal liability if the director or officer acted in an informed, diligent, and good-faith manner. Personal financial liability may arise when the damage results from a failure to comply with the director’s or officer’s legal or statutory duties, such as the duties of care and loyalty.
Is It Necessary to Have Legal Support for Business Decision-Making?
Although having legal advice is not mandatory when making business decisions, those decisions may have legal consequences both for the person who makes them and for the company. Therefore, having legal support allows business alternatives to be analyzed in advance, potential risks to be identified, and decisions to be made with greater confidence.
The Integral Business Advisory (AIE) service provides ongoing legal support in the company’s decision-making process. This gives directors and officers the legal backing they need to assess their actions, anticipate potential risks, and protect both their interests and those of the company.
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