Liability of the Member of

the Board in Case of the

Company’s Bankruptcy

Paul Varul

University of Tartu

Law Firm VARUL

Liability of the Member of the Board –

General Rules

• Contractual liability of the Member of the Board

• Internal relationship based on a contract

• Liability for violation of an obligation

• Main obligations: duties of care and loyalty

Submitting a claim against the

Member of the Board

• The claim shall be submitted by the Company

• Exceptionally, the claim can be submitted by the

creditor:

– If the Company cannot fulfil its obligations towards the creditor;

– The creditor claims compensation for damage from the

Member of the Management Board to the Company;

– Main reason – the unwillingness of the Company to submit the

claim

– In practise these kind of claims are very rare

Types of Liability of the Member of the

Board in case of the Company’s bankruptcy

• Contractual liability towards the bankrupt Company

• Non-contractual liability towards the creditors of the

debtor in bankruptcy proceedings

• Liability for the violation of obligations during the

bankruptcy proceedings

• Prohibition on business

• Criminal liability for the bankruptcy offences

• Types of Liability: civil liability, bankruptcy liability,

criminal liability

Submitting a claim against the Member of

the Board within the bankruptcy proceeding

– Contractual Liability

• The bases of the claim are the same – the Member

of the Board has caused damage to the Company

with the violation of his obligations

• A claim for compensation for damage can be

submitted only by the trustee, not the creditors

• In case of a grave error in management the trustee

is obliged to submit the claim for compensation for

damage

Grave error in management

• Grave error in management is intentional

violation of the obligations or violation of such

obligations through gross negligence by the

Member of the Board

The obligation of the Member of the

Board to submit a Bankruptcy petition

• If the Company is permanently insolvent, the

Member of the Board is obliged to submit a

Bankruptcy petition

• The Member of the Board has to submit the

Bankruptcy petition within 20 days from the

occurrence of permanent insolvency

• Every Member of the Board can submit the

Bankruptcy petition, even if the Members of the

Board are entitled to represent the Company jointly

Non-contractual liability of the Member

of the Board in case of failure to

submit the Bankruptcy petition • The obligation of the Member of the Board to submit

the Bankruptcy petition in case of permanent

insolvency serves the interests of the creditors

• The failure to submit the Bankruptcy petition constitutes

a violation of the obligations deriving from the law

towards the creditors

• The liability of the Member of the Board towards the

creditors of the company is non-contractual, delictual

liability

The bases of non-contractual liability

of the Member of the Board

• Causing damage to the creditors – their claims would

have been satisfied to a greater extent if the Member of

the Board had submitted the Bankruptcy petition in time

• The Member of the Board has violated his obligation

deriving from the law and has not submitted the

Bankrupcty petition in time

• Causation

• Fault of the Member of the Board

• Burden of proof

The obligations of the Member of the

Board during the bankruptcy proceedings

• The obligation to provide information; debtor's

oath

• The obligation to be personally present

• Prohibition from departing from residence

• Prohibition on disposal of the bankruptcy estate

The liability of the Member of the Board for

the violation of the obligations during the

Bankruptcy proceedings

• A fine

• Detention for up to three months

• After the obligation has been performed, the

Member of the Board shall be released

Prohibition on business

• The substance of the prohibition on business: prohibition to act

as a sole proprietor, a member of a board and a member of a

council of a legal person, the liquidator of a legal person or a

procurator

• The court decides whether to apply the prohibition on business or

not

• Main reason to apply the prohibition on business – the Member

of the Board has made grave errors in management

• The prohibition on business may be applied:

– For the time of bankruptcy proceedings

– For three years after the end of the bankruptcy proceedings (if convicted

of a bankruptcy offence relating to the occurrence of insolvency, e.g.

causing insolvency intentionally)

Criminal liability of the Member of the Board

– criminal offences relating to Bankruptcy

• Intentionally causing insolvency of the

Company (assuming unjustified obligations,

assigning assets or transferring assets below

reasonable price, etc.)

• Submission of incorrect information during the

bankruptcy proceedings

• Perjury

• Failure to perform the obligation of submitting a

bankruptcy petition

Thank you for your

attention!

Paul Varul

Advokaadibüroo VARUL

Advokaadibüroo VARUL includes sixty five attorneys and lawyers in its offices in

Tallinn, Tartu, Riga, Vilnius and Minsk. The firm specialises in counselling local and

international clients in all areas of corporate law.

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