When is the management board of a limited-liability company liable for the company's debts? | In Principle

Capital companies, as legal persons, bear unlimited liability for their debts. Meanwhile, shareholders are generally not liable for the debts of the company, but are at risk only up to the amount they have invested in the company. Similarly, because the management board incurs obligations for the company and not for its own account, the members of the management board generally are not liable to third parties.

The latter rule is subject to major exceptions, for example under Art. 21(3) of the Bankruptcy & Rehabilitation Law and Art. 116 of the Tax Ordinance. A separate basis for liability, discussed below, is provided by the Commercial Companies Code, particularly Art. 299, under which management board members may be liable when the company is not in a position to meet its obligations to creditors.

Under this provision, if execution against the company is ineffective, the members of the management board are jointly and severally liable for its debts.

This liability is imposed on all persons who are members of the management board during the period of existence of the company’s debt for which execution against the company proved ineffective. Thus it applies also to debts that are not yet due and payable at the time the person is serving on the management board, under the assumption that members of the management board should be aware of the state of the company’s finances on an ongoing basis, and thus should be aware of whether or not the company is able to satisfy its creditors.

Under the views presented in the case law, the basis for liability of a management board member under Commercial Companies Code Art. 299 §1 involving ineffective execution against the company means that execution must be ineffective against any and all assets of the company. It should be pointed out, however, that ineffective execution may be demonstrated by various forms of evidence, and thus it is not necessary to prove ineffectiveness in the course of an execution proceeding. It is presumed that there is no need to commence execution against specific assets of the company from which actual satisfaction is unlikely under the circumstances. Evidence of ineffectiveness of execution may thus also include, for example, issuance of an order denying a motion to declare bankruptcy because the assets of the company are insufficient to cover the costs of the bankruptcy proceeding, or other evidence showing that the company does not hold assets enabling it to satisfy the creditor. This means that the creditor need not exercise all possible means of execution, and it is sufficient to show the ineffectiveness of satisfaction using any means.

To determine whether a creditor’s claim against a management board member is warranted, under Civil Procedure Code Art. 316 the court looks to the company’s asset position as of the time the hearing in the case is closed. It must be clear at that time that the creditor cannot be satisfied out of the company’s assets.

The construction of Commercial Companies Code Art. 299 demonstrates that in order to hold the management board liable, it is sufficient for the creditor to demonstrate the existence of the obligation and the ineffectiveness of execution against the company. There are certain circumstances provided in the article that may release a management board member from liability, but once the creditor has made its case, the defendant bears the burden of proof on these defences.