Company Board Members' Liability and Prerequisites for it in Bankruptcy Proceedings

• Author: Merike Varusk
• Pages: 186-196

186 JURIDICA INTERNATIONAL 21/2014

Merike Varusk

Judge, Harju County Court

Company Board Members’

Liability and Prerequisites for

it in Bankruptcy Proceedings

1. Introduction

This article deals with the question of what kind of liability can be applied to a company board member in

bankruptcy proceedings for infringement of his duties. In analysis of these duties and any infringements

thereof, the board member’s actions can be assessed for purposes of enabling determination, in the course

of the bankruptcy proceedings, of whether the company’s insolvency was caused by a grave error in man-

agement by the board member, a deed possessing constituent elements of an offence, or another factor.

When management errors are present, there is reason to ask whether a board member’s liability follows. If

liability does follow, there will arise a need to ascertain what kind of liability can be applied. Prerequisite

for the above-mentioned course of action will be analysis of the board member’s duties. A separate object of

scrutiny is whether there are duties that do not entail liability.

As a general rule, infringement of a board member’s duties entails liability for indemnif‌i cation, since

between a company and its board member there is a mandate-like relationship due to which infringement

entails contractual civil liability. While dealing with civil liability, the article does not refer to the creditor’s

right to assert a claim on the basis of the law of torts, since this piece takes as its starting point the company

board member’s liability that proceeds from the entrustment relationship between him and the company.

In addition, one must scrutinise whether the infringement of the board member’s duties would justify appli-

cation of penal liability. Thirdly, one must examine in which cases imposing of prohibition on business

through application of bankruptcy law would be justif‌i ed.

2. Duties whose infringement entails liability

The legal relationship between a company and a board member may be regarded as an entrustment in

the sense stipulated by §619 of the Law of Obligations Act*1 (LOA). In determination of the nature of the

relationship between a company and a board member thereof, provisions of the Commercial Code, Law of

Obligations Act, General Part of the Civil Code Act, etc. must be taken into consideration, along with the

company’s charter, decisions of its governing bodies, and the contract concluded between the company and

the board member. The main element of this relationship is the board member’s duties. For consideration

of these matters, the present paper categorises the relevant duties via hierarchical division into general and

1 Law of Obligations Act. – RT I 2001, 81, 487; 29.11.2013, 4.

http://dx.doi.org/10.12697/JI.2014.21.17