Director and parent company liability
Under what circumstances can a director or parent company be held liable for a company’s insolvency?
Slovenian insolvency legislation differentiates between two types of director liability:
- liability towards the company; and
- liability towards the company’s creditors.
- perform their duties with professional due diligence;
- strive for short and long-term solvency of the company; and
- ensure compliance with insolvency and financial operations legislation (eg, rules concerning business finance and corporate governance, risk management, liquidity risk management, monitoring and capital adequacy).
Supervisory boards must supervise the company’s solvency positions and the directors’ discharge of their duties.
Directors and supervisory board members may be held jointly and severally liable for any damages caused by their failure to properly discharge their respective duties towards the company. The business judgement rule is used to determine whether a director’s duties were performed with required due diligence. Under certain circumstances, creditors may bring an action on behalf of a company for the reparation of damages.
Direct liability towards a company’s creditors is limited to bankruptcy proceedings. Directors and supervisory board members are liable for any shortfall that the creditors suffer when trying to recover their claims in full in bankruptcy proceedings if they violate certain insolvency legislation rules (eg, equal treatment of creditors or timely reporting on financial restructuring measures). Directors and supervisory board members bear the burden of proving that a shortfall is not the result of a failure on their part to discharge their duties.
Parent company liability is prescribed as part of the general Companies Act, which also applies outside of insolvency and restructuring procedures to solvent companies. A parent company may be held liable under the piercing-the-corporate-veil rules or where it instructs a subsidiary to enter into a harmful transaction. Damages to a subsidiary must be compensated in the same financial year, otherwise the parent company (as well as its directors) may be held liable for damages suffered by the subsidiary. Directors of a subsidiary must disclose harmful instructions in annual reports or face being held liable for damages suffered by the subsidiary.
What defences are available to a liable director or parent company?
Directors and supervisory board members are not liable towards the company if they can prove that they could not have prevented, eliminated or avoided the consequences which led to damages. Further, they are not liable towards the company if they can prove that they performed their duties with professional due diligence. In accordance with Supreme Court case law, due diligence is assessed on the basis of the business judgement rule.
Directors and supervisory board members are not liable towards creditors if they can prove that damages occurred due to the actions of other people which the directors could not have prevented, eliminated or avoided even if they had acted with professional due diligence. Further, each director or supervisory board member is free of liability towards creditors if:
- they can prove that they could not have performed the necessary actions individually, but suggested at the management or supervisory board meeting that certain actions should be carried out, which was opposed by other managers or board members;
- the director or member of the supervisory board responsible for the company’s financial operations failed to prepare the necessary materials; or
- a director was unaware of or could not have prevented non-compliance, even though they performed their duties with professional due diligence.
What due diligence should be conducted to limit liability?
Directors or supervisory board members must act with professional due diligence at all times. Further, once the company’s insolvency is established internally, the Financial Operations, Insolvency Proceedings and Compulsory Winding-Up Act (Official Gazette of the Republic of Slovenia 126/2007) should be strictly followed to avoid or limit any damages towards the company’s creditors.
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