Month: October 2025

Legal impasse: who is liable when shareholders fail to take decisions?

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In practice, it is often the case that a company's shareholders, because of internal disagreements or conflicts, do not take decisions that only they can take. Such inaction complicates corporate governance and decision-making and, at the same time, creates the risk of the manager being held liable for failing to fulfil his/her statutory duties.

As Karolina Briliūtė, Senior Associate at AVOCAD, points out, even when the CEO has no realistic opportunity to fulfil his or her duty - for example, to present a set of financial statements because the shareholders do not approve them - the CEO is still responsible.

Both the Civil Code and the Companies Act provide for broad limits to the liability of the manager. The CEO is responsible for organising the company's day-to-day operations, ensuring that reports are prepared and submitted to shareholders for approval. However, only the General Meeting of Shareholders can approve the set of annual financial statements - and without this decision, the manager cannot transmit the documents to the Centre of Registers.

"This creates a paradox - the law requires the manager to submit certified accounts, but the manager does not have the right to certify them. This leaves him between two conflicting requirements - the obligation and the actual possibility of fulfilling it", comments an AVOCAD lawyer.

Shareholder conflicts - a manager's responsibility?

When a set of financial statements is not approved because of shareholder conflicts, the authorities often impose administrative liability on the CEO. In such cases, no circumstances, even objective ones, normally remove the manager's liability.

"Even in the case of an apparent shareholder dispute that is not resolved, the authorities usually apply a formal assessment - they do not look at the reasons, but at whether the obligation has been fulfilled," says K. L. Briliūtė.

Case law has established that neither disputes between shareholders nor the fact that shareholders do not approve a company's annual accounts for certain reasons, which may be subjective, is considered sufficient to exclude liability. The courts also note that, even if shareholders deliberately block the adoption of decisions, this does not reduce the liability of the manager for the formal failure to perform his duties.

"This means that a manager can be punished for actions that he or she could not objectively perform. This situation raises questions about the balance of justice - whether the formal imposition of liability in all cases is in line with the rule of law", she notes.

Although there are cases in the case law of the Court of Cassation where objective circumstances are taken into account, these precedents remain rare. In some cases, the courts have held that the gravity of the act and the actual violation of the shareholders' rights must be taken into account when assessing the liability of the manager. However, in most cases, the liability of the manager remains formal, irrespective of the consequences or context.

There are few legal options for the CEO. One of them is to go to court to order the shareholders to take a decision. However, such a process can take several years and costs, during which time fines can continue to be imposed on the manager.

"In this situation, court proceedings can only be a solution in the long term, but they do not prevent new fines and can only create a legal precedent in the long term," points out K. L. Briliūtė.

In conclusion, she stresses that treating the circumstances more favourably for the manager is the exception rather than the rule. Therefore, according to Karolina Briliūtė, it is important for the authorities to take into account objective circumstances beyond the manager's control when assessing the imposition of administrative liability, especially when shareholders deliberately delay or block decision-making.

"A manager's responsibilities should be assessed in a holistic way, taking into account not only the formal requirements but also the actual possibilities of implementing them. Otherwise, the manager becomes a hostage to a situation created by legally independent shareholders", she concludes.

 

Do the courts apply double standards in protecting the interests of the state and private business?

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In court practice, it is not uncommon for a court to decide, before the judgment in a civil case has become final or even without notifying the defendant, to impose interim measures - to seize the defendant's assets (movable, immovable, monetary funds or property rights).

Such attachment applies where there is a risk that the defendant may conceal or embezzle his assets. The purpose of the attachment is to preserve the assets from which the claimant could recover the debt if the court were to award the debt.

It seems a necessary and justifiable measure to prevent unscrupulous debtors from actually paying their creditors. However, it can be particularly damaging for businesses. The seizure of cash essentially means that the company cannot pay its employees,Sodra, the State Tax Inspectorate, business partners with whom there are no legal disputes (e.g. suppliers of raw materials or of utilities or other services vital to the operation of the business, etc.), which leads to stagnation of the company's activity and solvency problems, and ultimately to bankruptcy of the business. Such frightening consequences may even become a means of pressure exerted by the claimant on the defendant's business, since, due to the negative effects of the attachments in question, the defendants pay their debts without any attempt to contest them, even though they may be doubtful.

The courts of general jurisdiction must therefore strike a balance between the creditor's interest in the debtor's maintenance of assets from which the debt can be recovered and the debtor's interest in avoiding the imposition of excessive attachment measures and the destruction of a business which is only enriching the assets from which the creditor can recover the debt, essentially applies the following formula: it is necessary to establish that the defendant has acted in bad faith, either by deliberately seeking to worsen its financial situation (for example, by selling its assets below market prices) or by taking other steps which would specifically make it more difficult to enforce a judgment which might be favourable to the applicant. (Order of the Court of Appeal of Lithuania of 25 July 2019 in civil case No e2-611-464/2019; Order of the Court of Appeal of Lithuania of 18 July 2019 in civil case No e2-614-450/2019).

However, there are cases in which public authorities are claiming the debt from the same entrepreneur. For example, when the National Paying Agency (NPA) decides that an entrepreneur has not properly implemented a project, it decides to recover the aid paid. However, the fact that the State considers that the project has not been implemented or has not been implemented properly and that the aid should be recovered does not mean that this is the case, because in a legal dispute the court may conclude that the project has been implemented properly and that the State is not justified in claiming the recovery of the aid paid. Although such cases are reserved to the administrative courts, the Supreme Administrative Court has takenthe position that the nature of the claims is pecuniary in nature, since the issue is precisely the recovery of a debt.

Thus, in essence, the cases concerning debts owed to a private person (e.g. a company) and to the NMA are the same debt recovery cases. The only difference is that debt recovery proceedings in favour of the NMA are dealt with by administrative courts rather than courts of general jurisdiction. The question arises whether the fact that the proceedings for the recovery of a debt owed to the State are brought before an administrative court rather than a court of general jurisdiction should allow the issue of seizure to be dealt with in a different way from that of the courts of general jurisdiction. Elementary logic suggests that such cases should be decided by applying the same principles as in the case-law of the courts of general jurisdiction.

However, if we look at the case law of the administrative courts, we note that the interests of the State as a creditor are generally better protected in the case of attachment of the defendant's assets. In cases of debt in favour of a public authority, the administrative courts do not determine whether the debtor is dishonest and deliberately seeks to conceal or embezzle assets, but it is sufficient to establish that, for example, the amount of the debt sought is substantial, so that the failure to seize the debtor's assets (e.g. the assets of a company), including its accounts, will not lead to the recovery of the debt.

Thus, unlike courts of general jurisdiction, administrative courts do not, in principle, examine whether the defendant is potentially dishonest or whether he is hiding assets when they seize assets in proceedings for the repayment of a debt in favour of a public authority. Administrative courts, when they find that a debt, the validity of which is still being disputed, is substantial, simply seize the defendant's assets, thus effectively paralysing the defendant's (company's) activities.

The courts do have a difficult task in striking a balance between protecting the interests of business and the state in such cases, but it is to be hoped that eventually the case law of both administrative and general courts will become uniform and predictable in interpreting the standards of attachment and in respecting the principle of equal treatment.

 

Dainius Antanaitis, Attorney at Law of the Law Firm AVOCAD

What does the seller of a used car have to guarantee and what does a short-term "commercial guarantee" really mean?

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When buying a used car that is no longer covered by the manufacturer's warranty, buyers are often tempted by additional offers such as "3 months warranty", "5,000 km warranty", "6 months trouble-free". Such promises may sound attractive, but from a legal point of view, what matters is not what the seller promises, but what the seller's real obligations are under the law, and what these additional "commercial" guarantees actually mean. "The seller's obligation to guarantee the quality of a used car is a legal one - it cannot be replaced or limited by short-term warranties. However, in practice we often see that warranties of a few months protect the seller rather than the buyer," says Mantas Baigys, a lawyer at AVOCAD.

Seller's obligation to ensure quality

According to the Civil Code of the Republic of Lithuania, the seller of a used car must guarantee that the item sold is of the right quality, i.e. that it is free from hidden defects of which the buyer has not been informed. Whether or not an additional commercial guarantee has been given. According to an AVOCAD lawyer, if after the purchase it turns out that the car had hidden defects that the buyer was not informed of - for example, defects in the engine or gearbox - the buyer has the right to claim, at his or her own option:

  • free of charge to fix defects,
  • reduce the purchase price,
  • reimbursement of repair costs;
  • replacing your car (if possible);
  • or, if the defect is material, terminate the contract and refund the money.

"It's important to understand that this obligation is not an additional service - it's a statutory responsibility. The buyer does not lose the right to claim, for example, reimbursement of the costs of repairing hidden defects in the car, just because the 'commercial' warranty of a few months or the mileage specified in it has expired," notes Baigys.

Commercial guarantees - attractive but limited

Used car dealers often offer short-term warranties such as "5,000 km warranty" or "6 months protection". These warranties usually cover only a few parts of the car, and the exceptions sometimes outweigh the real benefits. "A typical case is a buyer purchasing a car with a 5,000 km warranty. A month later, after a little more driving, the car breaks down (e.g. engine failure) and the seller declares that the warranty is no longer valid. However, if the breakdown is caused by a defect that existed at the time of sale, the seller is liable for it, whether or not the commercial warranty was provided," says the lawyer. Such so-called commercial warranties often give the false impression that the buyer's rights also end at the end of a specified period or number of kilometres. "This is not true. The law protects the buyer against hidden defects regardless of the terms of the additional commercial guarantee. It cannot exclude the seller's liability for a defective product," stresses Baigys.

Can I take legal action if the guarantee has expired?

According to the lawyer, this is one of the most frequent questions from buyers. "Yes, you can," the lawyer makes clear.If the defect is due to a cause that existed at the time of sale and was not brought to the buyer's attention, the buyer can go to court and claim, for example, the cost of repairs, even if the warranty has technically expired or the "warranty" mileage is exceeded.

In deciding on the quality of the sold item, the case law of the Supreme Court of Lithuania has noted that the buyer must prove that the sold item is of inadequate quality, i.e. that it cannot be used for its intended purpose, that it does not meet the quality requirements for items of this kind, and that at the time of the purchase the buyer did not know and could not have been aware of the defects in the sold item. However, it is for the seller to prove that the defects in the goods sold arose after the conclusion of the contract of sale or through the fault of the buyer, that those defects are not attributable to causes which arose before the sale of the goods, that the buyer, as an average and prudent buyer, should have been aware of the possible defects in the goods sold, and so on, that is to say, that those defects reduce the seller's responsibility for the quality of the goods sold.

"The seller is not liable because the warranty has or has not expired, but because he sold a poor quality car. This is a matter of law, not a matter of contract," emphasises Mr Baigys.

When does a guarantee really make sense?

Additional guarantees can only be useful if they complement, not replace, the buyer's rights under the law. For example, if they provide real benefits - faster service or a wider service network, or remedying defects in the car that are not related to hidden defects - they have real value. But when a formal commercial guarantee becomes a way of limiting the seller's liability for the quality of the item, it loses its meaning.

"Short-term guarantees often look attractive, but their aim is not to guarantee quality but to create an illusion of security. A short warranty or a few thousand "warranty" kilometres does not change anything - if the car was sold with a defect, the buyer has the right to claim, for example, reimbursement of the costs, whether or not there was an additional commercial warranty," says Mr Baigys.

Finally, one key piece of advice - in all cases, assess what your legal rights are and then assess whether, for example, the seller's refusal to repair hidden defects in the car, e.g. under the guise of a commercial warranty, is actually in line with the legal framework.

 

Is it worth notarising a preliminary real estate contract?   

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The property market has remained active in recent years, while the supply of new-build housing has been limited. As a result, buyers are increasingly signing contracts to buy properties that have not yet been built. In this case, the first step is usually the signing of a preliminary contract.

"A preliminary agreement is an agreement between the parties to enter into a future main contract of sale and purchase. It is a kind of commitment by which the buyer and the seller define in advance the terms of the future transaction," explains Eimantas Čepas, an attorney at AVOCAD.

Buying an unbuilt home: how does a pre-agreement work?

The Civil Code provides special rules for the acquisition of future assets. In this case, the buyer, a natural person, may conclude a preliminary contract for the sale of an unbuilt house or apartment, under which the seller undertakes to build the property as provided for in the contract and then to conclude the main contract. One of the usual elements of these contracts is the payment of a down payment by the buyer, which often amounts to a significant sum. However, it is this element that can later become a headache for the buyer.

"As construction processes can take a year or more, there is a risk that the contract will expire before the property is built. In this case, the buyer is faced with a situation where the deposit paid is frozen and the seller is unable to meet his obligations due to financial difficulties," the lawyer notes.

What happens when a builder defaults?

If the party that concluded the preliminary agreement unreasonably avoids or refuses to conclude the main agreement, it must compensate the other party for the damage caused.

However, in practice, according to Mr Čeps, the buyer often has to go to court to recover the advance payment, and court proceedings can be lengthy.

Notarisation - extra protection

By law, only the main contract for the sale of the property must be concluded in notarial form. However, a notary may also certify a preliminary contract if the law allows it to be concluded in a simple written form.

"Notarisation enables the contract to be used directly as a legal basis for obtaining an enforceable instrument. This means that if the seller defaults, the buyer can apply directly to the notary for an enforcement record and immediately submit this document to the bailiff for enforcement," notes AVOCAD attorney at law Eimantas Čepas.

This mechanism significantly speeds up the process of recovering advances and increases the likelihood of real recovery without lengthy litigation.

Notarisation of the preliminary agreement is an effective protection measure, especially for purchases of unbuilt housing. "It is a rational step for the buyer who wants to ensure that the invested funds are protected and that in case of unforeseen difficulties of the builder, it is possible to quickly initiate the recovery of the debt," emphasises E. Čepas.