On 27 July 2023, the Court of Appeal of Lithuania (the Court) examined a civil case based on the claim in which it was requested to jointly and severally award damages for the loss caused by the unlawful actions of the members of the company’s board.
In this case, the Court has provided important clarifications on the application of civil liability to the board members.
The case dealt with the issue of whether the actions of the board members by which they approved the granting of a loan to an entity which was later unable to fulfil its obligations could be considered unlawful.
The Court noted that when civil liability of the board members arises due to failure to perform or improper performance of their duties specified in the Civil Code of the Republic of Lithuania (the Civil Code) or in the company’s articles of association, the damage caused to the legal entity must be fully compensated, unless otherwise provided by law, articles of association, or a contract.
The liability of the members of the management body of a legal entity for the failure to perform their duties properly is primarily based on their relationship with the entity, which arises from the obligations based on trust between the entity and the members of its management body and the obligation to comply with fiduciary duties, i.e., to act fairly and reasonably towards the company, to be loyal, to maintain confidentiality, avoid conflicts of interests, etc. Thus, the competence of the board members includes not only the specific duties inherent to the collegial management body of such a legal entity and its members, but also the general fiduciary duties inherent to the members of the management bodies of all legal entities (Article 2.87 parts1-4 of the Civil Code).
The Court notes that the application of liability for violation of fiduciary duties and mandatory provisions is slightly different. For violation of fiduciary duties and in cases where the legality of the actions of the members of the management bodies is decided by applying the business judgement rule, the liability of the members of the management bodies arises and is applicable only in cases of gross negligence or intent. By contrast, the members of the management body are subject to civil liability for violating mandatory provisions established by law, even in the case of simple negligence.
In view of the Court’s clarification on the application of liability to board member, and in order to clearly define the boundaries of the board member’s liability, we propose to conclude agreements regarding the board member’s activities, which clearly define duties and responsibilities of the board member, the obligations to comply not only with specific legal acts, but also to follow the most beneficial business judgement rule, and to clearly and unequivocally establish the liability of the board member, as well as the conditions regarding the compensation of damages.
For more information or advice on corporate law matters, please consult the lawyers of ECOVIS ProventusLaw.
Prepared by Brigida Bacienė, head of Employment practice of ECOVIS ProventusLaw, and associate Inga Olifer
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