February 23, 2018

Liability of Company Directors Under Lithuanian Law

The Supreme Court of Lithuania has established a precedent that tightened rules on personal liability for directors of companies.

In Lithuania a directors of a companies may be held personally responsible if the company suffers any damages due to: (1) a statutory violation; (2) a breach of the duty to exercise reasonable care, skill, and diligence; (3) a violation of duties as a company employee.

Liability arising from the breach of duties as a company employee is regulated by the Lithuanian Labor Code, which states that the maximum compensation for any harm caused cannot exceed six months of renumeration. By contrast, compensation for damages caused by wrongfully implementing the duties of a company’s managing body – regulated by civil law – are usually considered a tort, which provides for full compensation.

In its recent decisions the Supreme Court of Lithuania has defined some differences in the liability of a director of a company caused by the breach of fiduciary duties and the liability caused by the violation of statutory provisions.

Liability for a director of a company that is caused by a breach of his or her fiduciary duties requires a finding of gross negligence or wrongful intent. Lithuanian case law widens the scope of the business judgment rule in corporate governance to allow for the taking of reasonable risks necessary for business growth. Therefore the business judgment rule affords the presumption that a director acted in good faith and absolves that director of personal liability unless it is established that he or she engaged in fraud, bad faith, or an abuse of discretion.

Though the fiduciary duties of a director of a company require him or her to be reasonable and diligent while doing business, statutory law obliges directors to strictly follow the scope of legal provisions. It is important that according to Lithuanian case law the business judgment rule only applies to matters arising, for example, in arrangements between the director and the company, and does not justify any discrepancy from mandatory provisions of law. Under Lithuanian law, the fault of the director of a company in breach of peremptory statutory legislation is presumed, which means he or she bears sole responsibility for full compensation of any damages to the company caused by the breach unless that presumption is overcome. The infringement of any peremptory provisions in Lithuania is considered a tort, which allows the principle of full compensation of damages to be applied.

For instance, Lithuanian legislation obliges the director of a company to maintain full and accurate accounting records and to make relevant fillings to the tax administrator and ensure the due payment of all necessary taxes. Such regulations require the director of the company to ensure that all of the company’s activities comply with tax laws and other applicable legislation. While other countries treat the company itself as responsible for any violation of tax laws, Lithuanian regulations in such cases apply strict liability to the director of the company. As the same rules apply to all peremptory Lithuanian regulations, directors of companies do not have any other option but to comply – and ensure that their companies comply – with all Lithuanian laws. This allows for the presumption that in almost every case where is a breach of a peremptory provision and it causes damages to the company, the director will be held fully liable to the company and its shareholders. Such liability encompasses the obligation to compensate the company for any negative consequences that it suffered because of the improper administration of taxes or any other infringement of the law in full.

Lithuanian regulations on the strict liability of the director of a company are for the benefit of the company’s shareholders and its creditors, who are able to make claims for full compensation against the director of the company that could help to restore the company’s balance sheet to the state that it was in before the misconduct. Lithuanian legislation and case law on the liability of directors of companies ensure not only the full compensation for damages to the company caused by any breach of statutory provisions, but also, in overall scope, help to ensure the due administration of the company.

By Inga Kostogriz-Vaitkiene, Partner, and Ieva Zablasckaite, Associate, CEE Attorneys Lithuania