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Are company managers liable for damage caused by contracts they conclude?

Does a company manager have to compensate damages for loss-making sale of company-owned property?

Author: Augustė Linauskaitė (internship at bnt Vilnius)

Increasingly often, company managers find themselves in risky situations in terms of the business decisions they make. Although it seems that business decisions are less risky in situations where managers are at the same time the sole shareholder, the risk becomes especially relevant since it is quite often very difficult for those managers not to become involved in a conflict of interest and to distinguish company-owned property from personally-owned property. In these cases, it is important to take care about the terms, especially when a manager in person purchases a company-owned property. This was also clearly emphasized by the Lithuanian Supreme Court when the manager of a company was ordered to pay EUR 142 020, 86 in damages for unlawfully purchasing part of company-owned real estate and selling another part to a third party based on prices below the actual value of the property.

In performing their duties, such as concluding sales contracts, company managers should place greater focus on the duty to avoid conflicts of interest, to act solely in the company’s interests and not to confuse company assets with their own assets. Although managers are not forbidden to conclude contracts with their company, nevertheless exercising this right involves an obligation to notify other bodies of the same legal entity or shareholders as well as a duty not to harm the company’s interests.

Company managers should also keep in mind the importance of the company’s financial position in the context of their responsibilities. Normally, shareholders’ interests prevail, but if the company's financial condition deteriorates, the importance of creditors' interests increases. Even where managers are the sole shareholder, if they are aware of their company’s poor financial situation and conclude contracts that are financially damaging to the company, the result is breach of the duty to act loyally, honestly and reasonably. To ensure avoidance of civil liability, company managers must ‒ before determining the real estate sale price ‒ first assess the average market price.

On this very question, on 15 March 2018 the Lithuanian Supreme Court stated that the data on the value provided by the State Enterprise Centre of Registers is decisive in establishing the value. Valuation by private companies ‒ even if eventually the real estate is sold for a higher price than privately estimated ‒ results in inevitable liability if the price does not match the data on the State Enterprise Centre of Registers.

In the case under discussion, property owned by the company was sold for a price three times lower than the value indicated in the Register. In addition, the fact of a company being in a poor financial situation does not as such mean that the amount of damages awarded depends on claims by creditors: damage is calculated according to the losses that the transaction caused to the company.

In conclusion, the latest case law determines precise management guidelines in order to fulfill managers’ obligations and rights. The interests of the company and its financial standing must always be assessed before concluding a contract.

Source: Decision of the Lithuanian Supreme Court of 15 March 2018 in civil case No. 3K-3-84-684/2018