Liability of the Management
According to the Limited Liability Companies Act a member of the board of directors and the managing director shall be liable in damages for the loss that he/she, in violation of the duty of care, has in office deliberately or negligently caused to the company. If the damage has been caused by an act in violation of the provisions of law (other than general principles) or the articles of association or to the benefit of a related party, the damage shall always be compensated, in so far as the person liable does not prove that he/she acted with due care.
The liability of the management is commonly put into specific terms in the event of liquidation of a company or when the members of the board change.
The liability of the board members is collective, that is, it arises when the member of the board of directors participates in the board meeting where the decision causing damage was made. Each member of the board is equally liable for resolutions. In order to escape liability it is not always sufficient that a member votes against the resolution but the dissent of the member should be entered into the minutes of the meeting. Not even absence from the meeting is always enough in order to avoid liability. If a member has been absent from the meeting and he/she objects to a resolution, he/she should enter his/her dissent into the minutes in the following meeting. Lack of professionalism is not a ground for discharge either.
The liability of the managing director is usually broader than the one of the member of the board of directors or the supervisory board. That is because the managing director usually has more information and better acting position when a situation causing damage occurs. He/she has usually also better means to prevent such situations. The liability of the chairman of the board of directors and supervisory board can also be broader if special duties have been given to them.
A company acquisition or other similar corporate transactions are common situations that trigger liability. It is important to note that such a transaction always requires careful preparation. Other situations triggering liability might be:
major unprofitable business operations and possible compulsory liquidation;
considerable credit losses;
putting the shareholders in unequal positions;
operations relating to the shares;
supervision of the managing director (it is important to conduct sufficient investigations and risk analyses);
delay in payment of the transfer tax (possible tax increase as a consequence to the company);
negligence of the company’s internal control;
activities in violation of the articles of association (They are rare. Redemption situations or exceeding provisions concerning the field of activity mainly come into a question);
breach of law (e.g. activities in violation of labor law, environmental law or the securities markets legislation).
The board of directions has the right to bring an action for damages against a manager. It may, however, also be decided upon in the general meeting of shareholders.
The amount of compensation is, as a main rule, the full amount on the part of the manager towards the company, although mitigation is possible. Full compensation is usually to be paid for damages deliberately caused. The liability of a manager is determined individually. In case several members of the board of directors have caused the damage, joint and several compensation proceedings are applied. Liability is divided amongst the liable managers by the number of individuals. When estimating the amount of compensation of a manager, the amount of culpability remaining for each liable person, the possible benefit derived from the occurrence of damage and other corresponding factors are to be taken into consideration.
An action against the manager shall be brought within five years from the end of the financial period during which the act given rise to possible liability for damages or the act of negligence took place
A company may take management liability insurances for its managers [1.1.5 Business related insurances]. However, the liability insurances often contain numerous limitations of liability for damages.