Corporate / M&A
Romania: Can Officers and Managers Risk Personal Liability for their Company’s Debts?
→ Mădălina Neagu
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.
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.