Taking counsel: Liability of a company director: who has a right to file an action?

  • 2008-02-27
  • ByJurate Kugyte [Jurevicius Balciunas & Bartkus]
Considering that Lithuanian court practice with regard to civil claims toward company directors has become more extensive, it is important to analyze the range of people/entities allowed to file claims, as well as respective court practice.

The civil code establishes full civil liability of the members of management bodies of a company that fails to perform, or performs improperly, the director's duties as specified in the civil code, other laws or the company's incorporation documents. As Supreme Court practice shows, the right to file an action on behalf of the company is, in most cases, exercised either by the bankruptcy administrators against the former directors of the company under bankruptcy or by the new directors against the dismissed directors.
In cases where bankruptcy proceedings are not initiated or the director continues to perform his functions, the question arises as to how interests can be protected and who is entitled to file a claim. Lithuanian legislation sets forth several possibilities.

Derivative action. The Law on Companies sets forth the non-pecuniary right of a shareholder to file an action for compensation of damages incurred by the company (derivative action) resulting from non-performance or improper performance by the head of the company and board members. One should keep in mind that such a right is not burdened by the requirement to represent a particular percentage of the share capital in a company, as is the case in Portuguese, French or Czech corporate law.

Oblique action. Subject to certain conditions prescribed by the Civil Code, creditors are indirectly entitled to sue members of the management bodies for damages. It is notable that the right entitles the creditor to file an action exclusively on behalf of the company. This is known as an oblique action. In particular, the creditor whose right to claim against the debtor is certain and eligible for execution is entitled to exercise the rights on behalf of the company by bringing an action against the director in the company's name and in the event, where the company fails to implement this right himself, or refuses to exercise the right to the prejudice of the creditor's interests.

An oblique action may be brought only in the instances when the creditor is necessitated to protect his rights (in the event of the company's insolvency, bankruptcy proceedings instituted against him, or in any other extraordinary cases) and under the condition that the time-limit for the performance of obligations expired prior to the institution of the action. Upon satisfying an oblique action, the recovered property is set off into property of the company and will benefit all creditors of the company. There also might be a situation when the director of a company is also a shareholder. In such cases the creditor would be recommended to consider a direct action, when the Civil Code provides for subsidiary liability of the shareholder. Such liability might arise for the obligations of the company, when such obligations are not performed due to shareholder's acts in bad faith.
As Supreme Court practice shows, the third party (creditors) claims against members of management bodies are also admitted, when the action is filed not on behalf of the company, but on behalf of the creditor himself. Usually, those are the cases when the criminal or administrative liability of the members of the management bodies is already established by the previous judgment. In such cases the management member is deemed to be jointly liable with the company. As with other civil liability conditions, the third party must evidence its losses suffered due to illegal actions (for which the members of the management bodies were sentenced or held liable in the administrative procedure).

It is debatable whether management members in Lithuania are deemed to be protected by a corporate veil against direct actions for damages initiated by third parties. This protection is based on the consideration that the directors act on behalf of the company and perform functions vested in them. Nevertheless, a company director's joint liability toward third parties will be reasonably substantiated provided the courts apply civil liability in the case of severe misconduct.
It can be inferred that Lithuanian law sets forth enough wide options for realizing a director's liability, which should ensure the company director acts in the interests of the company and does not violate the rights of the third parties. 

Jurate Kugyte is an advocate at Jurevicius Balciunas & Bartkus, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms including Teder Glikman & Partnerid in Estonia and Kronbergs Cukste in Latvia, dedicated to providing a quality "one-stop shop" approach to clients' needs in the Baltics.