Corporate / M&A

Romania: Can Officers and Managers Risk Personal Liability for their Company’s Debts?

A general separation of liability exists between companies and management in respect of corporate debts. This legal separation may be pierced in cases of insolvency or outstanding tax liabilities where officers or managers have intentionally contributed to such circumstances.

General rule: separation of liability

Busi­ness peo­ple expect com­pa­nies to be exclu­sive­ly liable for their lia­bil­i­ties. Fur­ther­more, offi­cers and man­agers expect to receive ade­quate pro­tec­tion from the law when mak­ing busi­ness deci­sions for the com­pa­ny which, in their rea­son­able judg­ment, serve their company’s best inter­ests at the time.

As many com­pa­nies have faced a con­tin­u­ous eco­nom­ic decline since the start of the reces­sion, there have been increas­ing ques­tions from man­agers whether their posi­tion in Roman­ian com­pa­nies might entail per­son­al risks.

Liability towards the company and its shareholders

Accord­ing to the Com­pa­nies Law, the gen­er­al duty of loy­al­ty and dili­gence will not be deemed breached if the man­age­ment rea­son­ably con­sid­ered, based on ade­quate infor­ma­tion, that its busi­ness deci­sion served the company’s inter­ests at that time.

The Roman­ian High Court of Cas­sa­tion and Jus­tice test­ed the above prin­ci­ple a year ago. It cleared a direc­tor from lia­bil­i­ty after the direc­tor had been sued by the com­pa­ny for mis­man­age­ment and dam­ages as a result of sign­ing a com­mer­cial agree­ment alleged­ly detri­men­tal to the com­pa­ny.

In dis­miss­ing the claim, the High Court acknowl­edged that a director’s lia­bil­i­ty towards a com­pa­ny is essen­tial­ly con­trac­tu­al and, based on gen­er­al rules of con­trac­tu­al lia­bil­i­ty, the lia­bil­i­ty of the admin­is­tra­tor is pre­sumed until proven oth­er­wise. Nev­er­the­less, the High Court right­ful­ly acknowl­edged that a com­pa­ny is legal­ly pro­tect­ed against a director’s neg­li­gence or fraud, and not against inher­ent busi­ness risks when a busi­ness deci­sion tak­en in good faith turned out to be wrong. So long as management’s con­sent is not altered by its per­son­al inter­est, is based on prop­er infor­ma­tion and is tak­en in good faith, the law shields offi­cers and man­agers from lia­bil­i­ty towards the com­pa­ny and its share­hold­ers.

The High Court also ruled that the management’s lia­bil­i­ty is essen­tial­ly sec­ondary, and may be pur­sued only after the com­pa­ny has exhaust­ed all oth­er reme­dies, sanc­tions and claims that could lead to the recov­ery of dam­ages from third par­ties.

Liability towards creditors

The Com­pa­nies Law pro­vides that a cred­i­tor may file a direct claim against the man­age­ment of the com­pa­ny, but only with­in the pro­ce­dures of cor­po­rate insol­ven­cy (insol­ven­ta), reor­gan­i­sa­tion (reor­ga­ni­zare) or bank­rupt­cy (fal­i­ment).

The Law on Insol­ven­cy no 85/2006 fur­ther con­di­tions the pos­si­bil­i­ty of joint man­age­ment lia­bil­i­ty towards a com­pa­ny in insol­ven­cy if the man­age­ment active­ly or know­ing­ly con­tributed to the insol­ven­cy. The Law on Insol­ven­cy sets out an exhaus­tive list of cir­cum­stances that may trig­ger such joint lia­bil­i­ty, all cir­cum­stances relat­ing to the breach of the management’s ordi­nary duties of dili­gence and care. As opposed to lia­bil­i­ty towards the com­pa­ny and the share­hold­ers, lia­bil­i­ty towards cred­i­tors is essen­tial­ly in tort, and hence con­di­tion­al upon the cred­i­tors hav­ing proved an inten­tion­al act, or at least neg­li­gence by the man­age­ment in trig­ger­ing the insol­ven­cy.

Liability for outstanding taxes

A sec­ond set of excep­tions from the rule of sep­a­ra­tion of lia­bil­i­ty between com­pa­ny and man­age­ment is pro­vid­ed for the ben­e­fit of tax author­i­ties with respect to col­lect­ing tax­es.

Lia­bil­i­ty for the company’s out­stand­ing tax­es is not con­di­tion­al upon cor­po­rate insol­ven­cy (insol­ven­ta) but upon an insti­tu­tion­al state of fis­cal insol­ven­cy trig­gered by a lack of suf­fi­cient liq­uidi­ties or assets to meet the tax pay­ment oblig­a­tions (insolv­abil­i­tate).

Sim­i­lar to lia­bil­i­ty towards cred­i­tors, joint lia­bil­i­ty of the man­age­ment towards the fis­cal­ly insol­vent com­pa­ny is trig­gered by the intent (rea-cred­in­ta) of the man­age­ment in caus­ing the fis­cal insol­ven­cy. The man­age­ment ben­e­fits from a rel­a­tive pre­sump­tion of good faith; the tax author­i­ties must prove the inten­tion­al acts of the man­age­ment to hold them joint­ly liable towards the com­pa­ny.

Conclusions

Under cer­tain express and exhaus­tive cir­cum­stances may offi­cers and direc­tors be held joint­ly liable towards the com­pa­ny for its debts. Lia­bil­i­ty towards cred­i­tors and the tax author­i­ties is pro­vid­ed as an excep­tion to the gen­er­al rule of sep­a­ra­tion of lia­bil­i­ties. It is thus sub­ject to the cred­i­tors’ duty to prove the intent, or at least the neg­li­gence of the man­age­ment in harm­ing the inter­ests of the cred­i­tors. It has proven dif­fi­cult for claimants to prove man­age­ment intent to cause the cor­po­rate or fis­cal insol­ven­cy of the com­pa­nies, which has led to few cas­es where the management’s joint lia­bil­i­ty was trig­gered.

The Law on Insolvency sets out an exhaustive list of circumstances that may trigger joint management liability, all circumstances relating to the breach of the management’s ordinary duties of diligence and care.