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How statutory body members can easily lose their royalties and even property in 2014 (Part I)

How statutory body members can easily lose their royalties and even property in 2014 (Part I)

30.12.2013 5:30
Autor: Alica Stegmannová, KSB

The duty to act with the due care of a prudent business person, which cannot be restricted, remains the main criterion for assessing whether a statutory body member has fulfilled his/her duties. The penalties for breaching this duty are now more clearly defined and have also been expanded. Statutory body members who have breached the duty to act with due care are obligated to reimburse the company for any damage caused. While at first glance nothing seems to have changed, quite the opposite is true. The introductory provisions of the Corporations Act stipulate that where there is a requirement to compensate a party for damage, this includes non-property related damage, such as damage to the company’s reputation or loss of a long-term supplier.

Moreover, in addition to company or qualified shareholders, now even individual shareholders can sue a BoD member in cases where the company does not perform any activities and the shareholder represents the company’s inactive bodies.

A breach of due managerial care need not (and as a rule does not) affect only the company. The company’s creditors may be harmed as well. They, however, cannot sue the statutory body directly since there is usually no direct link between the breach and the damage caused. Therefore, they have to seek performance directly from the company. But if a statutory body member fails to compensate the company for damage, he/she will be liable towards the company’s creditors for its debts to the extent of the uncompensated damage.

Assessing whether a statutory body or member has breached the duty to act with due managerial care will not be easy in the future. The act, however, contains several new provisions that benefit statutory body members. First of all, when assessing liability, best practice is taken into account, i.e. how another reasonably careful person would act in a similar situation. Secondly, despite the fact that the burden of proof remains with the statutory body member, a court may relieve him/her of that burden if it comes to the conclusion that the burden is unjust.

Another new feature introduced this year is that a company and a statutory body member whose breach of his/her duties was detrimental to the company can conclude a settlement agreement. Despite various opinions concerning the contents of such agreements, we believe that they can reduce harm. The agreement, however, must be approved by the company’s supreme body via a qualified majority of votes.


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