Limited liability company has two main organs. Shareholders and board of directors. Shareholders are investors who pay in money for the share capital of the company and their liability is limited to the amount of this share capital. Whereas board of directors represents the company and may be liable for company’s debts.
Liability towards creditors
Art. 299 of Commercial Companies Code states that board members are jointly and severally liable with the company for company’s debt if enforcement against the company is not possible. This means that in certain situations creditors may reach into pocket of members of the board who will have to settle company’s debt from personal assets. In reality it means that the risk of running a business is born by the directors, not by the shareholders, whose liability is limited.
However, it is important to remember that creditors may not try to enforce debt against board members as a first step, this option is only available when the enforcement against the company is ineffective. In most cases such enforcement is taking place in court, so only upon finalizing court case against the company, creditor has an option trying to enforce in court debt against board members.
Liability against company
Board members can be personally liable for their actions also to the company. They can be sued by the company for damages caused by willful omission or action undertaken against the law or the articles of association.
Most of the times, in small companies, shareholders and board members are the same individuals. Board members are not protected from liability by their “shareholder status”. This means that shareholders who are also board members of the company will be liable for companies liabilities due to the fact that they are members of the board of the company.
Release from liability
On the basis of art. 299 Commercial Companies Code, board members should be able to discharge themselves of liability for their company’s debts by way of proving:
- that they filed a bankruptcy petition on time (or that a decision to institute restructuring proceedings was issued within the same time limit), or
- that the failure to file the petition on time was not due to their fault, or
- that the creditor has not suffered any damage as a result of their failure to file the petition on time.
A company shall be deemed insolvent if it fails to fulfil its due financial obligations against its creditors.
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