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26.09.2019

Liability of Board Members for Damage to the Company

The September 2019 issue of magazine iFinanses published an article by PRIMUS DERLING Partner Sintija Radionova and Attorney at Law Kristīne Sakārne on the Liability of Board Members for Damage to the Company.

The Department of Civil Cases, the Senate, the Supreme Court of the Republic of Latvia, rendered a judgment in the case dealing with liability aspects of board members and damage done to the company.

A joint stock company has sued its former management board members requesting that they jointly and severally make good the damage caused to the company by their action.

Not only were the loss-making contracts concluded on terms which did not comply with the prevailing market conditions, they were also kept separately, without being recorded in the company’s records of transactions and without obtaining any authorisation or approval for the conclusion of those transactions.

The case focused on all-embracing assessment of the conduct of management board members when they signed loss-making contracts disregarding the procedure pre-scribed by the laws and regulations and corporate documents of the company. A management board member has a duty of loyalty both to the company as an inde-pendent legal entity and to the economic interests of all shareholders of the company.

Curiously enough, the company involved in the case at hand has been working successfully.
This case provides a useful evaluation and message that even the management board of a company operating without loss can be held liable for the consequences of loss-making transactions in the company.

The judgment ruled that the arguments concerning the commencement of the limitation period, which the Court of Appeal wrongly attributed to the time of conclusion of the contracts, were justified. In its judgment, the Senate stated that in the case of periodic payments, it is not appropriate to count the start of the limitation period from the time the first payment is made and it is necessary to assess whether the loss is not the result of each undue payment.

Read the full text in latvian of the article in the September issue of iFinanses.

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