Not keeping track of the other statutory representative? You are jointly liable for any damage they cause!

The Supreme Court (SC) is sending a warning to statutory representatives in limited liability companies: if you do not monitor your colleagues, you are in breach of the fiduciary duty / due managerial care, therefore co-liable for damage that would otherwise not have been incurred (although to a lesser extent).

In the case in question, the Supreme Court (SC) dealt with the private-law liability for damage caused by embezzlement in a limited liability company. For a rather long period of time, one of its statutory representatives (statutory representative no. 1) had been withdrawing company funds and using them for his own needs. As soon as the other statutory representative (statutory representative no. 2) found out, he lodged a criminal complaint against his colleague.

Yet, in terms of statutory representative no. 2’s co-liability for damage, this was already too late. The court concluded that statutory representative no. 2 had breached his fiduciary duty as he did not devote proper attention to the company’s governance, factually allowing the embezzlement of its funds. Moreover, he only detected the unauthorised withdrawals from the company’s bank account with significant delay (of several years), allowing for the damage grow to nearly CZK 3 million.

Statutory representative no. 2 based his defence on arguments that he was not versed in accounting/book-keeping issues, therefore leaving this area to his colleague. The SC, however, explained that to prevent and detect the embezzlement in time, no special knowledge of booking had been necessary, and it would have sufficed to show a minimal interest in the company’s management – suspicious withdrawals of cash could have been detected simply by checking the company’s internet banking. The arguments that the misstatements were not even noticed by the company’s member who had approved the company’s financial statements without any reservations, were not heard either.

The SC concluded that statutory representative no. 2 breached his fiduciary duty as he only exercised his office formally (not taking part in the company’s management nor setting up proper controls), and was therefore liable, jointly and severally with statutory representative no. 1, for damage caused by the embezzlement.

The SC’s conclusions follow along the lines of the recent judgment of the High Court in Olomouc which held that members of the board of directors of a joint stock company had breached their fiduciary duty by neglecting to check the book-keeping entrusted to one them.

Even where powers and competences are properly divided among individual members of a statutory body (which was not the case here), it does not free the other members of the statutory body (or, if there is no collective body, other individual statutory bodies) of their duty to adequately supervise the exercise of such delegated powers. For other duties that members of statuary bodies should keep in mind when delegating powers, see our previous article here.

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