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Director and parent company liability

Liability

Under what circumstances can a director or parent company be held liable for a company’s insolvency?

A member of the board of directors and the managing director of a Finnish limited company may be held liable for damage caused by a wilful or negligent breach of the general fiduciary duties under the Companies Act, a specific provision of the Companies Act or the company’s articles of association.  A shareholder (parent company) may be held liable for damage caused to the company, a shareholder or a third party by a wilful or negligent breach of the Companies Act or the company’s articles of association. In a distressed situation, such actions that diminish the assets or increase the liabilities of a company without a business rationale are particularly susceptible to trigger liability.

The liability may be civil liability for the loss or damage caused or, in certain cases, criminal liability. Liability requires causality between the negligent or wilful misconduct and the loss or damage caused. The burden of proof lies with the accused board member or managing director – that is, it is not for the claimant to show negligence, but rather for the accused person to show that he or she acted diligently.

The board of directors must continuously assess the company’s financial standing and the need to file for bankruptcy or administration proceedings in order to protect creditors. Trading should be discontinued where it would cause or worsen the company’s state of insolvency.

The board of directors also has certain obligations to act where shareholders’ equity is adversely affected. 

Defences

What defences are available to a liable director or parent company?

The board member or managing director must show that he or she has acted diligently. Accordingly, corporate decision making should always be backed up by appropriate resolutions where the business rationale and the compliance of such decisions with the Companies Act are expressly assessed and stated in the minutes.

Due diligence

What due diligence should be conducted to limit liability?

This depends on the circumstances and the economic impact of the transactions. Where a contemplated transaction is estimated to have a major impact on the company, more extensive due diligence and a comparison of the options is usually required to show a sufficient level of diligence.#

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