Comparative overview of board member’s liability for the losses caused to the company
Corporate governance defines relationships between a company’s management, its board, its shareholders and its other stakeholders. It determines the way companies are managed and controlled. An effective corporate governance framework is of crucial importance because well-run companies are likely to be more competitive and more sustainable in the long term. Good corporate governance is first and foremost the responsibility of the company concerned, and rules at European and national level are in place to ensure that certain standards are respected.
In respect to influence to the company by the decisions taken by the board members, international and national organizations actively promoted to regulate liability of the board members more strictly. Therefore according to the problematic issue of the board members liability, LEADELL law offices – Pilv in Estonia, Fogels, Vitols & Paipa in Latvia, and Balčiūnas & Grajauskas in Lithuania prepared comparative legal overview of national legal regulations of all three countries regarding the board members liability for the losses caused to the company.
Basis for liability
In all three Baltic states board and council members are legally required to act in the interests of the company. In Latvia this requirement is included in the Commercial law, which provides that members of the board and council shall perform their duties as an honest and careful manager would. The term “as an honest and careful manager” is a general clause and content of it is left to court’s discretion. In case law, for example, failure to hand over the assets and accounting documents of the company when legally required to do so and conclusion of contracts that are outside of the scope of the company’s traditional business and cause loss to the company has been viewed as failure to perform duties as an honest and careful manner.
General clause related to board and council member’s liability can be found also in Estonian Commercial Code, which provides that a member of the management board or council (supervisory board) shall perform his or her duties with due diligence. The Estonian Supreme Court has explained that the due diligence of the board member among other means that the member must be careful, sufficiently informed in order to make decisions and cannot take unreasonable risks for the company.
In Lithuania board and council of a company are attributed to the corporate governance bodies and therefore, quite similar as in Latvia and Estonia, law requires them to act in good faith, be loyal to the company, avoid conflict of interests and perform duties as an honest and careful manager would. However, unlike it is in Latvia and Estonia, in Lithuania also an unlawful act of board or council member shall be proved, in order to hold the board or council member liable.
Lastly, in all three countries, in addition to aforementioned board or council member’s actions, claimant must prove that such actions have caused loss to the company and that there is causation between loss and the act.
Scope of the liability
In all three Baltic states law provides that the board and council member’s liability is shared, namely, all board and council members who fail to perform their duties as required by law, may have solidary liability for the loss caused to the company. Moreover, the liability also extends to previous board members if the according legal requirements are met. The amount of liability is not restricted by law and it can reach the actual amount of losses caused to company.
However, the claims against board members shall be brought within certain time period which is different in each country. According to the latest amendments to the Latvian Commercial Law, claims against board and council members shall lapse within five years as from the date the losses occurred. While, in case the claim against board or council member is brought by the creditor of the company who cannot gain satisfaction from company itself, such claim shall be brought for the benefit of the company within 1 year as from the date of entry into force of the judgment (with which the claim of creditors against the company has been satisfied).
In Estonia the limitation period for filing a claim against a member of the management board or council is five years, unless the articles of association of the private limited company or an agreement with the member of the management board prescribe another limitation period. The limitation period for a claim should be calculated from the violation of obligation.
In Lithuania according to the Civil Code the general term within which a claimant has the right to submit a claim against such board members is 3 years. The term begins from the moment the claimant became aware of the fact of damages. It also should be noted that according to the case law of the Supreme Court of Lithuania, civil liability for the losses caused to the company by board members and CEOs is separate liability which is divided between separate corporate governance bodies, i.e. the board and the CEO. As an example, is civil case No. 3K-7-124/2014 the Supreme Court of Lithuania established that civil liability of two different governance bodies should be determined by the partial obligation rules and only in highly exceptional cases the board and CEO may be held liable solidarily.
Limitation of the liability
Members of the board and council shall not be liable for the losses caused to the company if they prove that they have acted in accordance with the law. In Estonia and Lithuania there is a general burden of proof principle, namely, upon filing a claim the company or creditor of the company must prove that the member of board or council has violated the obligations as a result of which the damage was caused to the company. Afterwards the board or council member has the possibility to prove that he or she has performed the duties legally required to and within the framework of a lawful decision of the meeting of shareholders.
In Latvia there is an exception from this general principle and according to the case law of Latvian courts, the Commercial Law does not impose an obligation on the company or creditors to prove the guilt of a member of the board or council but to the contrary – it determines the presumption of guilt of the board or council member. The burden of proof that he or she has acted as an honest and careful manager would, lies upon the board or council member.
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