Taking Counsel: Civil liability of a sole governing body of a closed joint-stock company

  • 2009-12-09
  • By By Irmantas Dobilas [Jurevicius, Bartkus & Partners]

While assessing problems arising in company law, there is frequently a situation when, due to the unfair or ignorant actions of the sole governing body of the company – the manager of the company (hereinafter – the manager) – the company, and the shareholders, experience losses. The pressing problem is in what manner the issues of civil liability of the manager of the closed joint-stock company concerning the damage caused to the company be addressed.

On the one hand, the manager is bound by his relation to the company, i.e. the so-called “internal” relations. They are formalized by an employment contract and are regulated by the Labor Code of the Republic of Lithuania. On the other hand, the manager acts on behalf of the company in regard to other persons, represents the company by creating rights and obligations in regard to it. During these activities by the manager, relations with third persons arise, i.e. the so-called “external” relations, the expression of which are the contracts signed by the manager with other persons. These relations are regulated by the Civil Code of the Republic of Lithuania (hereinafter in the text – CC), Law on Companies of the Republic of Lithuania and other legislation.

In the civil case No. 3K-7-444/2009, by the decision of 20/11/2009, the Board of seven Judges of the Supreme Court of Lithuania explained the nature of the relations arising between the company and the sole governing body and formed principal rules regulating the liability of the director of the closed joint-stock company, as the governing body of the legal person, for the damage caused to the legal person.

The Board of Judges noted that the manager and the company are bound by contractual relations. They are formalized by an employment contract. Moreover, a contract covering his full material liability may be concluded with the manager. In the practice of the Court of Cassation, it is stressed that the manager, being the governing body of the company, determines that many rights and obligations of the latter arise on the basis of the law, and not the contract. Thus, the relations of the manager are more characteristic of the features of legislative representation. Moreover, the legal status of the manager as the governing body of the company is regulated by the norms of civil law, applied to the regulation of the activities of the bodies of joint-stock companies. The company and the manager are bound by trust (fiduciary) relations: this means that the manager must ex officio act exclusively in the interests of the company; the duty of loyalty is applied to him. This person represents the company, is responsible for the organization of the company‘s everyday activities. He must act carefully, honestly, competently and do everything that depends on him so that the company led by him operates in accordance with laws and other legislation.

The expanded board of judges pointed out that in the case when an employment contract is concluded with the manager, the legal relations that arise correspond not to labor but to civil legal relations, since the company’s and the manager’s relations are characteristic of features of legislative representation.

The peculiarities of the legal relations mentioned give grounds to state that: on the one hand, they confirm the status of the manager as the subject of legal labor relations, i.e., respectively as that of the employee and as the employer’s representative. This status of the manager as the subject of legal labor relations manifests itself in the so-called “internal” relations between the company and the manager. On the other hand, in the company’s relations with other persons, the manager acts solely on its behalf. This anchors the status of the manager as the representative of the legal person in the “external” relations, where higher requirements directly laid down in the civil laws are raised for the manager. Thus, a certain dualism of the manager and company’s relations exists: in the “internal” relations, the manager is taken as the subject of legal labor relations and in the “external” relations – as the company’s, i.e. legal person’s, governing body (and representative).

The Supreme Court of Lithuania has stated that in the cases when the manager of the closed joint-stock company causes damage to the company by acting as its governing body in the “external” relations, civil liability under the civil laws, and not material liability under the labor code, is applicable to him. In order to apply civil liability in the conditions specified formerly, the circumstance whether the contract, of his full material liability, is concluded is not significant.

Having stated that, namely, civil liability may be applied to the manager of the joint-stock company, it must be stated as well that in order to apply civil liability to the manager it is necessary to determine all conditions of its application – unlawful acts, damage (losses), causality and guilt. It should be noted that in the cases of such nature, from the formerly indicated conditions of civil liability, the plaintiff must prove unlawful acts of the defendant, the fact of the damage caused and the causality between the unlawful acts and damage. Having established that the defendant had performed unlawful acts that determined the emergence of damage (losses), his guilt would be presumed; therefore the plaintiff would not be obliged to prove that the manager of the company is guilty. It is the defendant, i.e. the manager of the company who, in order to avoid civil liability, should disprove this presumption on the basis of the absence of guilt.

The Supreme Court has already paid attention to the fact that the laws do not presume the damage caused by the unlawful acts of managers and its participants; the unlawful acts of the company’s governing bodies solely are not sufficient for the emergence of their civil liability. The obligations of the manager of the company specified in the provisions of laws to act on the company’s and its shareholders’ behalf, to act honestly and wisely in regard to the legal person and other members of the governing body of the legal person, also the provisions of the CC on the obligation of the manager, as the governing body of the legal person, to fully compensate the damage caused, give the grounds to state that the acts of the manager, while concluding and executing contracts, must ensure that damage (losses) are not caused to the company.

Irmantas Dobilas is an attorney-at-law at Jurevicius, Bartkus & Partners, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms including Glikman & Partnerid in Estonia and Kronbergs & Cukste in Latvia, dedicated to providing a quality “one-stop shop” approach to clients’ needs in the Baltics.