This newsflash covers novelties and trends in the field of board member liability. Initially it was stated that on 1 January 2015, new amendments to the Latvian Insolvency Law come into force setting liability of management board members for non-submission of accounting documents to the insolvency administrator. However currently there is a draft law submitted to the Parliament in order to postpone the effective date to 01.03.2015. On the other hand the Latvian Ministry of Finance is actively organising approval by the Parliament of amendments to the Law on Taxes and Duties that have already attracted public criticism. These amendments provide a mechanism entitling the State Revenue Service (SRS) to claim that a board member must settle tax liabilities delayed by the company. In addition, we have analysed cases of administrative violations that the Company Register (CR) is actively initiating against board members for non-submission of data or documents to the CR within the legal deadline.
Liability for failure to file accountancy documents with the insolvency administrator
Adopted amendments to the Insolvency Law will significantly change board member liability where company insolvency proceedings have been initiated.
Under the amendments the insolvency administrator will be entitled on behalf of the company to bring a claim in insolvency proceedings against all management board members jointly and severally for losses caused to the insolvent company if:
- the management board fails to file accounting documents with the administrator or
- the accounting documents do not present a clear image of the debtor’s transactions and property situation for the three years before announcement of insolvency proceedings.
In addition, an administrator may still be entitled to bring such a claim within a year after completion of insolvency proceedings.
The amount of loss is considered to be creditors’ claims recognised during the insolvency proceedings in the amount of the principal debt that cannot be covered within the scope of the insolvency proceedings, that is, non-covered claims. The court can decrease the amount for which a management board member is responsible by taking into account their influence in securing and maintaining accounting documents. Here, it should be noted that under the Commercial Law organising company accounts is a direct obligation of management board members, so that when delegating this function to some employee or accounting service provider, the management board is responsible for choosing an appropriate specialist to organise accounting documents. If the management board has several members, fields of liability and duties can be distributed among them and the fact noted accordingly.
The regulation in the Insolvency Law on liability for proper organisation of accounting documents applies to legal representatives who are responsible for organising accounts for other legal entities as well, for example, associations.
Until now, case law provided that non-submission of documents with the administrator was considered an unlawful activity, but non-submission did not in itself prove the existence of losses. Taking into account the amendments regarding management board liability and the fact that no company is protected from insolvency risk, we would stress the need to pay special attention to organising accounting documents in any company because non-submission of these with the administrator or failure to preserve them can be grounds for claiming losses from management board members.
Responsibility for delayed company tax liabilities
A meeting of State Secretaries on 5 June 2014 announced planned amendments to the Law on Taxes and Duties that determine how the SRS is entitled to claim that a management board member should cover delayed tax payment liabilities. In specific cases management board members will have joint and several personal liability for delayed company tax payments. However, if insolvency, legal protection or out-of-court legal protection proceedings have been announced for a company, the SRS will have no right to assess the obligation of a management board member to compensate delayed company tax payments.
To initiate proceedings against management board members for compensation of delayed tax payments, the SRS will have to detect whether all the following criteria have been met:
- the amount of delayed tax payments exceeds 50 minimum monthly salaries (in 2015 – EUR 18,000);
- a decision to collect the delayed tax payment has been notified to the taxpayer;
- after occurrence of the tax debt the taxpayer has been detected as having disposed of assets to an interested party (this criterion is not mentioned in the initial draft law, but is indicated on the home page of the Ministry of Finance);
- the taxpayer who performs business has not filed the legal entity’s insolvency application.
If all these criteria have been met, then on the basis of a formal statement issued by the SRS confirming non-payment as grounds to assume that the company will never satisfy its tax liabilities, the SRS will warn the taxpayer and the management board member in writing about initiation of proceedings to collect delayed tax payments.
The management board member will have fifteen days from announcement of a written SRS warning to file an insolvency application for the company or to settle the delayed tax payments so that the SRS stops the proceedings against the management board member for liability to compensate delayed tax payments.
Within the legal deadline, the management board member will have the option to produce evidence of (a) having acted as a dutiful and careful manager with regard to payment of the tax debt, as well as (b) objective reasons for non-submission of the insolvency application. The draft law lists in detail what information must be produced by the management board member to the tax administration. It should be noted that the scope of the information to be produced is comparatively broad and if the SRS detects that the management board member has not produced this information to the SRS, or if it turns out that the company accounting documents do not show a clear image of company transactions and the company property situation, the SRS may claim compensation of delayed tax payments from the management board member.
If the management board member does not pay the delayed tax shown in the SRS claim within deadline, the SRS must collect in line with the procedure laid down in Section 26 of the Law on Taxes and Duties. The draft law sets an option to request an extension of the payment term up to five years. The SRS claim for compensation of delayed tax payments can be challenged with the SRS director general, whose decision in turn can be challenged in court under a procedure set in the Administrative Procedure Law.
The draft law has already attracted a broad response from the public and criticism from lawyers and business representatives. Although the amendments aim, for example, to increase the liability of management board members for settlement of company taxes and mandatory payments to the state or municipality, in our opinion, the mechanism proposed disproportionately increases the liability of management board members and expressly favours state interests, so that it could significantly encumber the business environment in Latvia.
Liability for delaying time for filing data and documents with the CR
As of 1 January 2013, administrative violation cases involving non-submission of data or documents to the CR within the legal deadline are reviewed by the CR (previously they were reviewed by district (city) courts). Under the Administrative Violation Code of Latvia, the CR can send a warning for this violation or impose a penalty of EUR 70 to EUR 430. Note here that the CR carefully and actively monitors deadlines and initiates administrative violation cases for any delay, separately against each management board member.
The topicality of this issue is also disclosed by decisions of the chief state notary of the CR who often analyses timely performance of the duties of a management board that result from the notion of a “dutiful and careful manager”. In CR practice, liability is mitigated if the culprit shows sincere penitence for violation. In turn, an applicant’s work disability is considered to be a reason not to apply an administrative penalty. Note here that the fact that a document is signed abroad as the signatory resides abroad or organising notary formalities abroad is not considered a reason to decrease or cancel a penalty, or to send a warning.
According to information from the CR, the CR has developed guidelines on principles of applying administrative penalties in cases of administrative violations. Under these guidelines, a warning can be sent only where the deadline for filing documents is missed by not more than seven days.
In short, this means taking extra care with organising execution of corporate documents and filing them with the CR.