Introduction
The legal framework governing corporate governance and responsibility, particularly in the context of bankruptcy proceedings, plays a crucial role in maintaining corporate integrity and safeguarding stakeholder interests.This article delves into the specific provisions of the Corporate Law (specifically referencing the Croatian “Zakon o trgovačkim društvima” – ZTD), focusing on the liability of corporate management for damages caused to the company and the legitimacy of claims in the event of bankruptcy.
The Scope of Management Responsibility
Under Article 252 of the Corporate Law, management members are obligated to conduct company affairs with the diligence of a prudent and conscientious businessman and to preserve the company’s trade secrets. A failure to adhere to these standards establishes a ground for liability. Importantly, this article specifies that if management actions lead to company losses or depreciate the company’s capital, the board members are held collectively liable.
The liability extends to ordinary negligence, not just intentional or gross negligence. The burden of proof in disputes lies with the management members who must demonstrate that they have exercised due diligence. Thus, the scope of responsibility is broader than in criminal proceedings, ensuring comprehensive accountability.
Management’s Responsibility to the Company
The accountability of the management to the company is enshrined in the law, particularly when actions contrary to legal stipulations or the company’s charter are taken. These include:
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- Returning the capital contributions to members,
- Distributing interests or dividends illegally,
- Engaging in transactions involving the company’s business shares,
- Misappropriating the company’s assets,
- Committing to payments post the company’s insolvency or over-indebtedness,
- Compensating supervisory board members, and
- Granting loans in contravention of the law.
In such instances, management is held accountable if the mentioned conditions, encompassing their fault or negligence, are met. It’s evident in acts that blatantly contravene the law or the company’s agreements. Managers or directors are obligated to conduct business affairs with the diligence of a prudent and conscientious businessman and maintain the company’s confidentiality.
Management’s Responsibility to Creditors
Creditors can directly claim damages against the company’s management. This claim arises if:
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- They cannot satisfy their claims from the company’s assets.
- The management grossly neglected its duty to apply the diligence of a prudent and conscientious businessman.
The burden of proof for establishing gross negligence lies with the creditor (plaintiff). Judicial precedents suggest that circumstances like the company’s account being frozen at the time of contract conclusion do not inherently indicate a breach of duty by the management.
Management’s Liability for Exploiting Influence
A distinct form of liability arises when management exploits its influence within the company. The affected parties—company, creditors, and even members (if their loss is independent of the company’s loss)—can seek damages. Notably, members cannot claim damages for the devaluation of their shares since it’s a consequence of the company’s loss.
Responsibility of Members for Company Obligations
In limited liability companies, members or shareholders are generally not responsible for the company’s obligations, except as defined by corporate law. However, abuse of this privilege, such as using the company to achieve illegal goals, harming creditors, mismanaging company assets, or depleting company resources for personal gain, can lead to personal liability. The proof burden for such abuses lies with the creditors in legal proceedings.
Claims by Creditors in Bankruptcy Proceedings
In cases where a company undergoes bankruptcy proceedings, Article 252, Paragraph 5 of the Corporate Law becomes particularly pertinent. It states that during bankruptcy, only the bankruptcy trustee is authorized to initiate claims against the company’s management for damages. This provision ensures that the bankruptcy process is orderly and equitable, preventing individual creditors from directly pursuing claims that might disrupt the collective process of bankruptcy settlement.
The rationale behind this provision is to protect the interests of all creditors and ensure an equitable distribution of the bankrupt company’s assets. It recognizes that claims against management for damages are essentially claims of the company, thereby necessitating their central handling by the bankruptcy trustee.
Responsibility for Damages due to Misuse of Influence
Another critical aspect covered under the Corporate Law is the responsibility for damages resulting from the misuse of influence within the company. This includes scenarios where influential members or governing bodies cause the management to undertake actions detrimental to the company. In such cases, the law provides for both the company and its creditors to claim damages. This provision aims to deter misuse of influence and encourages transparent and fair governance practices.
Implications for Management and Creditors
The legal provisions underscore the importance of responsible corporate governance. Management is expected to make decisions in the best interest of the company, balancing risk and opportunity diligently. In cases of bankruptcy, the law ensures that the rights of creditors are respected and that claims against management are handled in an organized and fair manner.
Conclusion
The liability of management in limited liability companies is a complex and layered aspect of corporate law. It necessitates a keen understanding of legal obligations towards the company, creditors, and the careful navigation of internal corporate influence. These responsibilities highlight the need for prudent and lawful management practices, ensuring the company’s and stakeholders’ interests are protected. The Corporate Law establishes a comprehensive legal framework that holds company management accountable for their actions, particularly in instances of bankruptcy. It underscores the importance of diligent and responsible management while ensuring that creditor rights are protected during bankruptcy proceedings. This legal structure is instrumental in fostering a robust business environment where corporate governance is taken seriously, and the interests of all stakeholders are adequately safeguarded.