Big business is partly like a game of soccer: the key to success – the right selection of players and, of course, a coach who prepares the team for matches and is responsible for its performance on the field. In business, the team plays a key role, and the choice of manager predetermines the fate of the business, its success or fiasco. Both in sports and in business, management is sometimes given full carte blanche to make important decisions that affect the results of the season. If the team's results do not meet the owner's expectations, the top manager risks losing his post.
It is true that no one is immune to mistakes and wrong decisions… However, what if such mistakes are made by a manager because of negligence or even malicious intent? A lost match cannot be played again, and the score on the scoreboard cannot be changed after the final whistle… But unlike soccer, a business owner can count on reimbursement of financial losses that pulled his company to the bottom of the «standings» due to the fault of the top manager. How can this be done and how can the director of the company be held liable for penalties?
Trainer answers…
How can you distinguish between reckless or negligent management of a firm and ordinary entrepreneurial snark, without which a business cannot exist? When external factors (such as force majeure) affect the operation of a business, or when a director has made logical and reasonable management decisions, but the result is still negative, there is no liability for the top manager and losses are covered in the way provided for in the articles of association. When a director violates the main principles of corporate governance – to act reasonably and in good faith in the interests of the company, and this causes financial damage, the judge will certainly protect the interests of the owner of the company.
How to correctly calculate the financial damage to the company to recover the appropriate amount from the top manager? According to the law, losses are:
- The value of lost, damaged or destroyed property.
- The unplanned expenses incurred by the company, such as penalties or money paid for additional work and materials.
- The loss of profit (lost profits) on which the company was counting.
Practice example. In one court case, the amount of damages was determined as the amount of debt paid in favor of a creditor in a bankruptcy case. The director of a firm signed a number of contracts in excess of his authority, which resulted in a debt to a private enterprise. The court recognized these contracts as invalid after the monetary settlement between the LLC and the PE. Therefore, the amount was unreasonably paid under an invalid transaction and became a loss for the LLC. The LLC member recovered this amount in court from the LLC director.
Generally, practice shows that courts willingly recover direct losses, but it is much more difficult to recover lost profits. For this purpose, you will need a balanced argumentation from a professional lawyer.
HOW TO PROVE THAT A TRAINER GAMES THE Opponents?
The loss is recoverable by the director if it can be proved that the property losses of the company are due to the bad faith or reckless actions of the official. As already mentioned, individual decisions of a director may lead to losses, but the consequences in the form of financial liability only occur when such actions violated the law or the company's charter, were contrary to the company's interests, were carried out in the presence of a conflict of interest, or the decisions and actions were clearly unreasonable, i.e. have no economic or other reasonable justification.
Practical example. The director of an LLC engaged in commodity agricultural production, terminated a contract with the company's director. As a result, the company lost several thousand hectares of land. Subsequently, a member of the LLC found out that the same land plots were leased from LLC-2, where the same director was the founder and head. Although formally the director acted within the limits of his authority, the transactions were concluded with a conflict of interest, which resulted in losses that were charged to the director.
WHICH OF THE TRAINER'S STAFF SHOULD BE SENDED OUT?
Another important aspect that a business owner should also consider is whether it is the director or another officer of the firm who is to blame for the losses. For example, a company may have a collegial body – a board or directorate that made the decision that led to the company's losses. If any member of the collegial body voted against such an illegal/unreasonable decision or did not take part in the discussion of the issue at all, he will not be liable for causing losses.
There are also cases when a transaction was concluded under one director, and unreasonable violation of the terms of fulfillment of such a contract allowed another person – his successor. In such a case, the guilty party will not be the one who concluded the contract that potentially caused the damage, but the one who allowed improper fulfillment of contractual obligations.
When applying to the court for material damages, the owner of the company must carefully justify its position, namely:
- Specify exactly what actions committed by the director.
- Explain why such actions were committed in violation of the principles of corporate governance – reasonableness/ good faith.
- Calculate the losses correctly, show in what they are expressed.
- Provide evidence that the losses occurred precisely because the director violated his obligations.
Defense STRATEGY OF THE TRENNER
The director, in turn, may choose one of these defense tactics in court to justify his or her own decisions and actions:
- Try to justify either good faith or reasonableness of his or her actions.
- Disputing the amount of losses or proving that they are caused by other factors that the director himself does not control.
Finally, it should be recognized that in Ukraine the practice of holding top managers of enterprises financially liable for their reckless decisions is only beginning to take shape. But every day corporate lawyers face such cases more and more often. The law allows not only the company, but also its individual participants to sue the director; shareholders can also apply to the court with a demand to the top manager to compensate for the damage caused to the company. This makes it possible to effectively protect their rights, preventing abuse by hired officials. The only question is which strategy to match your lawyer…
Author: Yulia Kurilo, attorney-at-law, expert on subsidiary liability of business owners and managers
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