When are statutory representatives liable for their company’s debts?
At the end of June, the Supreme Court (SC) issued a judgment dealing with the conditions of the liability of statutory representatives of a limited liability company for the company's debts. The court also commented on the possibility to recover debts from statutory representatives if it is not possible to recover them from the company.
A statutory representative of a business corporation has the duty to exercise the office with a due managerial care, i.e., with the necessary loyalty, knowledge, and diligence. According to established interpretation by the SC, this means that the statutory representative of a limited liability company is obliged to act in an informed manner, i.e., to use reasonably available information sources and to carefully consider the possible advantages and disadvantages of various options based on them when making decisions. Whether they have met this duty is then assessed from the perspective of the facts that were known or could and should (if using available information sources) have been known to them at the time of making the business decisions.
If a statutory representative breaches this obligation, be it knowingly or negligently, they are liable for the damage they have thus caused to the company. If they do not compensate the company for such damage, they are liable to the company’s creditors for its debts (to the extent that they failed to compensate the damage) if the creditors are unable to recover the debt directly from the company.
In the present case, a statutory representative of company A repeatedly attempted to recover an alleged claim against company B, even though he was aware of a final and conclusive court decision stating that that claim did not exist. By one of those lawsuits, he thus caused damage to company B consisting in the costs of legal proceedings.
At first, company B tried to obtain compensation for this damage from company A, which, however, was already insolvent at that time and therefore unable to provide compensation. Company B therefore claimed the damage compensation directly from the statutory representative who had caused it, arguing that he was liable for company A's debts because he had caused damage to that company by breaching his duty of due managerial care.
During the court proceedings, it was considered whether the statutory representative may only be liable for the company's debts if they had been already called upon to settle the damage. This issue is particularly relevant in cases where the statutory representative is at the same time also the sole member, therefore it cannot be expected that the company would make such a call.
In that regard, the SC concluded that for the damage to be recoverable from the statutory representative, it suffices that their debt to damaged company is at that time due - the company does not have to call upon its statutory representative to settle the debt to the company.
The statutory representative is not liable for any damage caused to the company, but only for damage they have caused by breaching their duties. As for due managerial care, a statutory representative must always act and recognise the potential risks of his actions as an ordinary ‘reasonably diligent’ manager would. The SC then concluded that when initiating any legal proceedings, it is always necessary to consider the possibility that it may be necessary to cover the opposing party’s costs of proceedings.