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
A manager not only ensures the day-to-day operations of the company but must also fulfill fiduciary duties —namely , the duties of loyalty and care. “This means that a manager must act honestly and prudently toward the legal entity and other members of its governing bodies, be loyal to the company, and maintain confidentiality. They must avoid situations where their personal interests conflict or may conflict with the interests of the legal entity. A manager should not confuse the legal entity’s assets with his own, nor use them or the information he obtains as a member of the legal entity’s governing body for personal gain or to benefit a third party without the consent of the legal entity’s shareholders, etc. “It is the manager’s duty to act exclusively in the company’s interests,” the attorney emphasizes.
According to E. Langis, a company director must meet the objective criteria of a diligent and competent businessperson in the conduct of their duties. The duties of care and loyalty, according to the lawyer, will not be breached if a decision is made in good faith—without a conflict of interest, after examining information about the possible consequences of the decision, reviewing all necessary information, and assessing whether the business decision exceeds reasonable commercial risk. Furthermore, when making decisions, a manager must also assess the company’s normal economic and commercial activities and the nature of its operations, taking into account the company’s risk tolerance level.
There is no direct contractual relationship between the manager and the creditors; rather, the manager’s fiduciary duty to take creditors’ interests into account when making decisions related to the company’s operations arises only when the company’s financial condition deteriorates. “The manager’s liability to creditors arises only when the company is unable to satisfy the creditor’s claims on its own,” notes E. 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 attorney, if the tax authority files a direct claim against the manager, the unpaid taxes may be considered damages caused to the creditor, since taxes must be paid by law solely to this creditor. If the manager evades paying taxes, his actions are considered directed against a specific creditor. “A very important point in such situations is whether the company would have been able to pay the taxes at the time they were due,” notes E. Langys.
Risks and legitimacy of business decision-making
Attorney E. Langys points out that a business transaction that ends in a loss does not in itself mean that the manager acted unlawfully. Liability applies not to the negative economic outcome of the actions, but to the legality of the actions at the time the decision was made. “A business decision made without violating the duty of care and loyalty is considered lawful, even if it resulted in a loss for 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.