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De facto manager liability

Lithuania: Criteria for establishing liability in the practice of the Supreme Court of Lithuania

Author: Roberta Palčiauskaitė (internship at bnt Vilnius)

On 7 February 2018 the Lithuanian Supreme Court (LSC) further developed Court practice on the civil liability of company managers. The court clarified the relationship between de facto (informal) and de jure (formal) managers. Additionally, the LSC explained the scope of liability and criteria for recognizing a de facto manager. This practice, shaped by the LSC, will affect de facto managers of a company who create a favourable situation for themselves by hiding behind de jure managers but who are directly active in the company's internal affairs.
In real life it is quite a common scenario when a de jure manager does not perform their functions, which are carried out by another person ‒ the de facto manager. It is up to the courts to set criteria for distinguishing between actual and formal company management.

In its decision, the LSC set clear criteria for recognizing de facto and de jure managers. The LSC analyzed the situation in which the Defendant is a Claimant’s (a bankrupt private limited liability company’s) sole shareholder and an employee-consultant who has been actively involved in company activities ‒ in other words, managing the company as de facto manager. The LSC held that, in that case, shareholders who expand their sphere of influence in a company up to assuming a sole management function must be regarded as a manager in terms of civil liability.

Applying liability is the same as for de jure managers. The Court has identified the criteria for establishing whether a non-official company manager should be recognized as the actual manager: (1) performing the management function (as well as issuing mandatory instructions to the formally appointed management bodies); (2) permanent management means systematically performing actions that, according to the laws and founding documents, are typical of the manager of a legal person. In the present case, the Court strictly assesses whether the defendant's activities exceeded the functions specific to an employee and a shareholder, whether the defendant was alone in making business decisions and whether these activities were continuous. These criteria form the basis for recognizing the issue of management as a de facto manager. In short, business decision-making criteria distinguish the manager from other employees and shareholders.

The LSC also emphasized that if a company is headed by an actual manager, in the case where a de jure manager is appointed, the responsibilities of members of management bodies established by law must be complied with by both managers of the company. The responsibility of both de facto and de jure managers is joint when it is acknowledged that both have violated the company’s fiduciary duties and their mutual actions cause damage.


Source: Decision of the Lithuanian Supreme Court of 7 February 2018 in civil case No. 3K-3-4-313/2018

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