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It has been reported that a trial court in Lithuania held two officers of a close corporation personally liable to the tune of about 5000 USD ostensibly for what is known as insolvent trading.

The case was brought by UAB Transvera against two officers of UAB Dovlitas.

Although sometimes the liability of a director in such a situation is described as being fiduciary, it really is not. It is delictual in nature.
The idea is that a person on a board who either knows or should know that the company is insolvent should not allow it to incur a debt, obviously because it will not be paid. Some commentators criticize the entire idea: as one Australian expert puts it,

Those who oppose the duty argue that it has the effect of making
directors unduly risk-averse which can result in directors too quickly putting companies
into voluntary administration or liquidation for fear of personal liability.

Depending upon the legal regime in place, the question turns on what the knowledge, imputed or otherwise, has to be. Is it merely the suspicion that a company will become insolvent by the time the debt is due? Is it actual insolvency at the time of the incurring of the debt? The former is a very strict standard. Standards were loosened recently due to the economic crisis in Germany …

In all of the countries whose law I surveyed in writing this piece, such as Ireland, Singapore, Australia and Germany, the basis of the ‘legal institute’ is statutory.

In the particular Lithuanian case, it appears that the company (UAB Dovlitas) may have been solvent at the time the debt was incurred. The reports say that the company was considering bankruptcy at that time. The court states that this fact, that is, that bankruptcy was being considered, ‘creates real conclusions’ that the debt would not be paid.

What is particularly of interest is that there is no statutory basis for the court’s decision. The court cited LT Civil Code (section 2.5(3)) that states:

When a legal entity cannot perform its obligation because of the unlawful actions of a participant, the participant is subsidiarily liable for the obligation of the legal entity.

A ‘participant’ is defined in the Code (sec. 2.45) as a party with an ownership interest, such as a shareholder.

Obviously, the definition of participant is being stretched here. It does not include directors. An argument could be made that directors are agents of the shareholders … but this gets weird, too; the shareholders should not be liable for insolvent trading.

The second problem is that Code states that the liability of the participants is not solidary, but subsidiary.

The Lithuanian court’s decision is interesting. But the facts ought to be rock-solid in imposing liability with no statutory basis: actual knowledge, undebatably insolvent, and so forth. Here the language used by the court, as reported, does not quite come up to snuff.

The link is here.

P.S. It’s another question why there is no statute regarding the matter in place.

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