12. 2. 2020

Slovene Supreme Court increases directors' liability for loss caused in the performance of their duties

In cases where a director's conduct results in a loss for third parties, the injured (third) parties may only sue the company for damages (which, on payment, may take an action against the director to recover those monies). The rule stems from Article 148 of the Slovene Obligations Code i.e. the so-called »corporate veil«, which has also been upheld on several occasions by the Supreme Court (e.g. VSRS judgment II Ips 101/2013, VSRS judgment II Ips 132/2016 etc.).

The rule is particularly problematic in cases where a company is bankrupt and therefore unable to pay damages to an injured party. In such cases, creditors can be left without compensation, with their only option being to file a claim in bankruptcy proceedings or an action against the director, but only at the expense of the entire bankruptcy estate. In practice, this means that many directors can shirk their responsibilities by claiming that they engaged in unfair business in their capacity as directors of the company, since creditors cannot sue them for damages directly in such cases.

However, in a recent judgment, Ref. No. VSRS II Ips 71/2018, the Supreme Court has moved away from this interpretation of the law and explained that the so-called “corporate veil” cannot be absolute. It addressed a case in which the buyer of a real estate requested, directly from the director, a refund of the purchase price which they had handed over to the director of the company. The director deceived the buyer into signing a precontract for the purchase of the real estate owned by the company and took cash in hand for the purchase. At a later date, when the buyer asked the company to conclude the contract, the manager became evasive. When the buyer asked the company for a refund, it refused on the grounds that the director had never handed over the purchase price.

The Supreme Court explained that it was true that the director had entered into the precontract as the company's legal representative; however, it also emphasized that it was clear from the facts of the case that the director had acted in a grossly unfair manner and had not acted for the benefit of the company, but was driven by his own dishonest interests. The director availed of his directorship as an asset or “disguise” for the purpose of unlawful gain. The Supreme Court ruled that in such instances creditors are entitled to sue the director for damages, since any contrary interpretation would be contrary fundamental principles of the law of obligations, including the principle of good faith and fair dealing.

This is the first judgment that "pierced the corporate veil" where directors are concerned, and demonstrated that directors can only invoke such legal protection when they actually act as agents of the interests of the company or when they pursue the interests of the company they represent. All in all this is, in our view, a positive step towards better protection for embattled creditors.

Author: Ana Kastelec, Attorney at Law
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