Updated 12.02.2024
Duties of the director
The Civil Code (CC) and the Law on Joint-Stock Companies (ABĮ) establish duties for the director, which he must comply with and which he must be guided by in his activities:
1. Duty to act honestly and reasonably;
2. Duty to act for the benefit of the company’s shareholders;
3. Duty of loyalty;
4. Duty of confidentiality;
5. Duty to avoid conflicts of interest;
6. Non-use of the company’s information and property;
7. Informing about the director’s transactions with the company.
These duties oblige the director to follow the criteria of reasonableness and honesty, to comply with the requirements established by laws and other legal acts, to act in such a way that his activities do not conflict with the company’s operational goals and are harmonized with the company’s internal documents. In case of violation of the specified duties and requirements, the question of the director’s responsibility arises.
Responsibility Types
Depending on the actions performed, different types of responsibility may be applicable to a director:
1. Disciplinary liability may be applied for gross breaches of duty, for example, by disclosing commercial or technological secrets; shareholders may impose one of the disciplinary sanctions on the director – a warning, reprimand, or dismissal from employment;
2. Civil liability is related to shareholders’ right to file a lawsuit against the director for full damages arising from failure or improper performance of director’s duties, for example, by entering into a contract exceeding their competence limits;
3. Administrative liability is applied by imposing administrative fines for administrative law violations, for example, the tax inspection may impose an administrative fine for accounting violations;
4. Criminal liability, whose sanctions include the prohibition of certain work or activities, fines, arrest, deprivation of liberty, may be applied for crimes against the financial system (including negligent, fraudulent accounting practices, and tax evasion). The applicable sanction for criminal offenses and crimes is proposed by the prosecutor, and the decision on its imposition is made by the court.
What the Company Director is Responsible for
1. The director of the company is responsible for damages due to non-compliance or improper compliance with requirements established in laws and other legal acts:
a) In accordance with Article 28 of the Law on Companies’ Financial Statements, the company’s director ensures the selection of the person preparing financial statements and the timely provision of accurate, comprehensive information about economic operations and other information necessary for the preparation of financial statements to the person preparing financial statements. Additionally, the company’s director is responsible for the preparation and submission of the company’s financial statements to the Registrar of Legal Entities (administrative liability applies);
b) In accordance with Article 37 (12) of the Law on Joint-Stock Companies, the director is responsible for various areas of organizational management (administrative liability applies);
c) In accordance with the Tax Administration Law, the director is responsible for non-compliance or improper compliance with obligations prescribed in this law, for example, failure to declare the declared tax, or unlawfully applying a lower tax rate, resulting in unlawfully reducing the payable tax (both administrative and criminal liability may apply).
2. The director is responsible for damages arising from the violation of the company’s statutes, other internal documents (shareholders’ decisions, board resolutions):
a) If the director breaches the duty of confidentiality and loyalty and discloses information about the company that does not correspond to reality, thereby damaging the company’s reputation, the director may be required to compensate for non-pecuniary damages;
b) If the director breaches the duty of loyalty and the duty to act in the interests of the company’s shareholders, and concludes a transaction under different conditions than those provided in the board’s or shareholders’ decision, resulting in losses for the company, the director may be required to fully compensate for the damages.
If the director concludes a transaction exceeding his/her competence, such transaction becomes obligatory for the company. The law provides an exception – the case where a third party who concluded the transaction knew that the director was exceeding his/her competence. In such case, the transaction does not incur obligations for the company.
A director who exceeds his/her competence is subsidiarily liable for the performance of the company’s obligations to a third party under this transaction, i.e., if the company does not satisfy the requirements of a third party, such obligation falls on the director who concluded the transaction.
Limiting the Director’s Actions
Transaction restrictions – the company’s articles of association may establish restrictions on the director’s activities for certain transactions, requiring shareholder approval for transactions exceeding the amount specified in the articles of association, for decisions regarding long-term assets whose value exceeds that specified in the articles of association, investments, transfers, or leases. The approval of the general meeting of shareholders does not exempt the director from liability for the decisions made.
Formation of the Board –bby forming a board, decision-making on the most important matters of the company’s activities is delegated to board members, of which there must be no fewer than three, for example, the board makes decisions for the company to become the founder of other legal entities, decisions regarding the investment or encumbrance of long-term assets. If a board is not formed in the company, decision-making on all specified matters rests with the director.
Quantitative representation – the company’s articles of association may stipulate that only a few persons together may conclude transactions on behalf of the company. Such representation is called quantitative. The articles of association must establish specific rules for such representation, for example, indicating that the director acts together with one board member or together with the entire board. If quantitative representation is established in the company’s articles of association and is registered in the Register of Legal Entities, a transaction concluded by only one of the persons entitled to conclude it does not create obligations for the company until the will of others, specified in the rule of quantitative representation, is expressed.
Limiting the Director’s Liability
The possibility of an exception to full damages compensation is provided in the Civil Code, i.e., the director’s liability may be limited by statutes or by agreement between the company’s director and the company. Ways to limit director’s liability:
1. Include provisions limiting the director’s liability in:
a) Employment contract;
b) Full material liability agreement;
c) Articles of association.
It is important that liability-limiting provisions do not contradict imperative (mandatory) legal norms. An agreement limiting or excluding the director’s liability for damages caused by intent or negligence is not valid. Civil liability may be limited by:
— Establishing the maximum amount of compensable losses;
— Restricting liability for direct damages, for example, only specific expenses.
2. Establish employee job descriptions, indicating specific employee duties and responsibility for non-performance or improper performance of those duties, thus “dividing” the director’s liability with the employees.
3. Insure the director’s civil liability. Insurance provides insurance protection for the consequences of the director’s improper actions – the insurer compensates for damage to third parties or the company.
In practice, the most common breaches by directors include: failure to ensure proper accounting and reporting management of the company; failure to comply with basic business administration rules (e.g., lending funds without assessing the borrower’s risky financial situation); assuming obligations without properly assessing the company’s capabilities; failure to meet legitimate and reasonable demands of the company’s creditors; concluding transactions with related parties not under market conditions or establishing conditions that, although legal, are not beneficial to the company, etc.
There are not many disputes resolved by Lithuanian courts regarding the compensation of damage caused to the company by the company manager’s illegal actions, which allows us to make two assumptions: first, disputes related to the manager’s liability issues are resolved out of court; secondly, the principles of the manager’s responsibility have not yet been fully implemented in the Lithuanian legal system.
Legal Acts:
— Civil Code
— Law on Joint Stock Companies
— Law on Accounting
— Law on Financial Statements of Enterprises
— Law on Tax Administration
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