We have recently prepared a study on court practice in Latvia in board liability cases. A short summary of our main findings appears below.
The study covered second and third instance judgments of Latvian courts in board liability cases between 2010 and 2014. In most of the cases, claims against board members were brought by insolvency administrators. This is understandable as an insolvency administrator has a legal duty to review the possibility to bring a claim against board members of an insolvent company. However, compared to the situation before 2010, the amount of claims against board members brought by other persons (mainly shareholders) is steadily increasing.
A larger amount of court cases helps to increase the awareness of judges of legal concepts related to board liability. As a result, we may conclude that in general Latvian courts have sufficient knowledge about basic issues of board liability. On the other hand, as most of the cases reviewed by the courts are still quite primitive, for example, on claiming losses from a board member who has emptied the company’s bank account by transferring company funds to their own accounts without any justification whatsoever, Latvian courts still lack experience in more complicated cases. Therefore, unless the circumstances of the case are very simple, the result of a board liability case can still be quite unpredictable. Thus, we have found court cases where in three different instances with (in essence) the same circumstances the decisions in each case are very different (even by one and the same court). Another important issue is the length of the court process, since deciding a case in three instances takes between five to seven years on average.
As for substantive issues, the following conclusions by Latvian courts are important to note.
A claimant may freely elect to bring a claim against one or several board members
The Latvian courts have widely agreed that even if several board members might be responsible for losses caused to a company (and this is especially so if there is no internal division of responsibilities among the board members), the claimant enjoys full freedom to elect to bring a claim against one or several board members; moreover, the courts are rejecting board members’ complaints in this respect. At the same time, the court has also confirmed that joint and several liability may only apply to board members who have been in their positions simultaneously.
Strict approach to shareholders’ meeting decisions on releasing the board from liability
The Latvian Commercial Law (Section 173) provides that a shareholders’ meeting may resolve to release a board member from liability for losses caused to a company if the loss has occurred and the circumstances of the board member’s activities have been disclosed at the shareholders’ meeting. When evaluating a decision taken by shareholders’ meetings on releasing a board member from liability, in one instance the Supreme Court resolved that a decision by the shareholders’ meeting was not valid because on the date of the respective shareholders’ meeting not all of the losses up to the last cent were known to the company. In addition, the Supreme Court noted that from the minutes of the shareholders’ meeting it was not clear if the shareholders had actually discussed the issue in sufficient detail. Although this Supreme Court decision is disputable at least to some extent, nevertheless it confirms that any decision on releasing board members from liability should be treated very carefully.
Board liable for additional losses caused to the company due to failure to file for insolvency
In general, the board members are of course not liable for normal business risks and therefore there is no general liability of board members in the case of insolvency of a company. However, in one case the Latvian court concluded that if the board had filed for insolvency of the company immediately after receiving a State Revenue Service decision on imposing a fine (which the company was not able to pay), the State Revenue Service would not have been able to calculate late payment penalties and therefore the board was liable to the company for calculated late payment penalties.