The modern company director: legal challenges and risks
Endless geopolitical tensions and military conflicts, shifting trade patterns and significant economic fluctuations are the challenges of modern business. Maximising profits without serious legal concerns is the ultimate goal of today's managers. Does everyone manage to break even and where are the biggest risks? Egidijus Langys, Managing Partner of AVOCAD, talks more about this and the limits of a manager's responsibility .
The Chief Executive Officer is the decision-maker who first organises the day-to-day running of the company. He or she hires and fires employees, concludes and terminates their contracts of employment, gives them incentives and imposes penalties. The manager acts on behalf of the company and has the right to conclude transactions, except where the company's articles of association provide for quantitative representation of the company. In short, he/she is responsible for the organisation of the company's activities and the achievement of its objectives.
Must act honestly and reasonably, with loyalty and confidentiality
As well as ensuring the day-to-day running of the company, a manager must also fulfil fiduciary duties of loyalty and care. "This means that a manager must act honestly and reasonably towards the legal entity and other members of the legal entity's organs, be loyal to the company and observe confidentiality. He must avoid situations where his personal interests conflict or may conflict with the interests of the legal person. A director should not confuse the assets of the legal entity with his or her own assets, use them or information obtained in his or her capacity as a member of an organ of the legal entity for personal benefit or for the benefit of a third party without the consent of the members of the legal entity, etc. The duty of a director is to act solely in the interests of the company," the lawyer stresses.
According to Mr Langis, a company's CEO must meet the objective criteria of a careful and qualified businessman. According to the lawyer, the duties of care and loyalty will not be breached if the decision is made in good faith - without conflict of interest, after having investigated the information about the possible consequences of the decision, after having been provided with all the necessary information, and after having evaluated whether the business decision does not exceed a reasonable commercial risk. In making decisions, the manager must also consider the normal business and commercial activities and the nature of the business of the company, taking into account the degree of risk tolerance of the company.
The manager and the creditor do not have a direct contractual relationship, and the manager's fiduciary duties to take into account the interests of creditors when taking decisions relating to the company's business activities only arise when the company's financial situation deteriorates. "The manager's liability to creditors arises only if the company is unable to satisfy the creditor's claims on its own," notes Langys.
Creditor's right to bring a direct action for damages against a company's director
A creditor can bring a direct action against the directors and shareholders of a company in two cases: where there is direct damage to the creditor and where the bankruptcy is declared intentional and the directors or shareholders are found to be guilty of intentional bankruptcy.
Liability of the manager can only arise if it is established that the manager of the company has acted unlawfully in order to infringe the rights of a particular creditor (misrepresentation, misrepresentation in the conclusion of a contract between the company and a particular creditor, or other unfair acts directed at a particular creditor). A director is also liable where those acts have caused damage to the creditor and the company is unable to meet the creditor's claims itself. Moreover, damage does not include the general insolvency of the company or a reduction in its solvency, which affects the individual creditor and other creditors of the company equally.
According to the lawyer, if a direct action against the manager is brought by the tax authorities, the unpaid taxes can be considered as damage caused to the creditor, as the taxes are only legally due to the creditor. If the manager evades the payment of tax, his actions must be regarded as directed against the creditor in question. "A very important point in such situations is whether the company would have been able to pay the tax at the time when it should have been calculated and paid," points out Mr Langys.
Risks and legitimacy of business decision-making
Langys points out that a business transaction that ends in a loss does not automatically mean that the manager has acted unlawfully. Liability is not for the negative economic result of the action, but for the legality of the actions taken at the time of the decision. "A business decision taken without breaching the duty of care and loyalty is considered lawful, even if it is detrimental to the company", says the lawyer.
The lawyer points out that all managers must be aware of the possible consequences of their decisions, which can range from damages to disqualification from holding the office of manager of a public or private legal person or from being a member of a collegiate management body for a period of 1 to 5 years. Improper decisions by a manager may also lead to administrative and criminal liability.