Taking Counsel: The company is losing money 's should the director or management be held responsible?

  • 2009-10-14
  • By Marijus Sakalauskas
The new Civil Code of the Republic of Lithuania, which came into force on July 1, 2001, introduced a new institution 's the investigation into a legal entity's activities.
Chapter X of the Civil Code enables members of a legal entity to request the court to appoint experts who would investigate whether the legal entity or legal entity's managing bodies or their members acted in a proper way.

Such a legal entity's right is explained that members of a legal entity entrust their capital to a legal entity and try to achieve their goals through it. Members entrust control of a legal entity to its managing bodies, which have to achieve the goals stipulated in the articles of incorporation. Such a legal entity acts, using its members' capital; therefore, its members have a right to know how this capital is used, administered and managed. Accordingly, legal means ensuring proper management are vested to a member of a legal entity.

The purpose of a private legal entity is to satisfy private interests. Frequently this means gaining economic benefits, along with profits, from the legal entity's activities. In the rulings passed by the panel of a civil division of The Supreme Court of Lithuania, in civil case No. 3K-3-16/2005 as of February 7, 2005, of UAB "Khartli" v. UAB Diagnostikos poliklinika, including civil case No. 3-3K-73/2008 as of February 11, 2008, of ship loader AB "Klaipedos Smelte" v. UAB "Birių krovinių terminalas," D. B. and  R. M., as well as civil case No. 3K-3-590/2008 as of December 9, 2008, of G.P. v. Pavestina and D.S,  there is indicated that the unprofitability of a private legal entity is a cause to embark on an investigation of the legal entity's activities. Therefore, by the investigation of a legal entity's activities it can be examined whether unprofitability of a legal entity's activities, and increasing debts of the company, has been caused not by actions or inactions of legal person's managing bodies but by other reasons as not related with management of the company. During the investigation it can be evaluated whether individuals managing the company were acting properly, reasonably, and in good faith so as to achieve the goals stipulated in the articles of incorporation.

It should be noted that the procedure of investigation of a legal entity's activities is implemented in a special order, as established in chapter X of the Civil Code. First of all, the legal entity is applied to in a pretrial procedure (to the legal person's managing body, its member), specifically indicating improper actions or unfair performance of obligations and requesting to terminate these improper actions in a reasonable time. If the situation is not changing and the company has not terminated improper actions, application for investigation is filed with the court.

Participation of an advocate is obligatory in drafting up an application for the investigation of activities. By applying to the court for starting the investigation of the activity, facts allowing for questioning the eligibility of managing individuals, and members' activities, should be provided; however, it is not obligatory to prove their committed specific violations.
After the court satisfies the application to start the investigation of activities, a judgment on starting the investigation of activities is passed, experts having the necessary qualifications to investigate the legal person's activities are appointed.

Experts shall have the right to examine the legal person's documents and question participants of the legal person, along with members and employees of managing individuals as well as persons who were the legal entity's members, members of managing bodies or employees in the period under investigation. On the experts' instruction, a legal person shall have to grant the possibility to examine that legal person's property.

After the investigation of the legal person's activities, the experts submit a report and guidelines. In the event there is indicated in the report that the legal entity's (legal entity's managing bodies or their members) activities are inappropriate, and the court approves the said conclusion, the court may, upon receipt of opinions of the parties and, if necessary, public institutions, apply appropriate measures to the legal entity. The court may revoke the decisions taken by the legal entity's managing bodies, suspend temporarily the powers of the members of legal entity's managing bodies or exclude a person from legal managing bodies' members as well as appoint provisional members of legal entity's managing bodies, etc. A member of a managing body of a legal entity who fails to perform his duties might be found personally liable to compensate the damage incurred by the company.

According to the data of the National Courts Administration, 54 cases regarding investigation of legal person's activities for the 2004 's 2008 period had been initiated. It does not seem to be a large number; nevertheless, since the number of bankruptcies is increasing during the time of economic crisis, the number of cases could be even higher.

Marijus Sakalauskas is an advocate 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.