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30.04.2021
Bankruptcy

Secondary Liability: How a TOP-Manager Can Prove His Faultlessness

Not infrequently attempts are made to impose secondary liability on managers and beneficiaries of companies for managerial and strategic failures or mistakes resulting in unprofitability of business.

The reason is that some transactions or decisions of top managers lie on the border area where it is not easy to distinguish between entrepreneurial risks and unfair conduct.

The ‘business judgement’ concept, according to which a director is exempt from liability if he acted within the limits of a reasonable entrepreneurial risk, is aimed at protecting the director against liability for a business failure.

The criteria for assessment of a director’s conduct have been developed by case law on corporate disputes, first of all, over recovery of damages from directors. The Supreme Court requires that inferior courts should take into account such case law during examination of secondary liability matters. Thus, courts will have to assess a director’s conduct by the following criteria:

1.    Economic viability of a decision taken. The director will need to substantiate convincingly that his decision was aimed at increase of profits or minimization of losses;

2.    Good faith, i.e. conduct expected of any person doing business;

3.    Due care, i.e. collection and analysis of information on the transaction and the party to it for identifying potential risks;

4.    Acting in best interest of the company is above anything else. The director should gain no personal benefit from the decision taken by him;

If the person having control over the company proves that he had sincerely intended to gain profit, assessed and taken into account all the risks and still his decision proved to be unsuccessful to business, then the case over imposition of secondary liability on him will most likely be adjudicated in his favor