Board liability in limited liability companies

- How do you minimise the risk of personal liability if the company you sit on the board of is struggling financially?

The starting point is that no one is personally liable for the limited liability company's obligations/debt. When you sit on the board of a limited company, you will therefore not be personally liable for the company's obligations.
The same applies to the company's shareholders, CEO and other employees.

However, as a member of the board of directors, you may be personally liable both criminally and financially in your role as a member of the board of directors of a limited liability company in the event that you, in your role for the company, act illegally or in a highly reprehensible manner.

In recent years, there has been a significant growth in the number of directors' liability cases brought before the courts, and the success rate has been relatively high for plaintiffs. It is therefore important that you, as a board member, are aware of the duties and responsibilities imposed on you in your role in and for the company.

The legal basis for liability for damages is set out in Chapter 17 of the Companies Act. For directors' liability, as for other forms of liability, there are three basic conditions:

1. There must be a basis for liability
2. The injured party must have suffered a financial loss
3. There must be a causal link between the offence and the damage caused

All members of the company's board of directors may be personally liable for their actions.

When can you take responsibility?

There may often be special rules in the Companies Act that result in/justify a board member being held liable, such as the objective responsibility for ensuring that the share capital is paid to the company or the rules on proper organisation of the business. Another very practical example is that board members are aware of the company's insolvency and continue to operate on behalf of the creditors without filing for bankruptcy or seeking measures to strengthen the company's equity.

As a board member, what can you do to avoid personal liability?

• Take part in the work of the board and familiarise yourself with the duties that come with your role
• If the company's finances are poor, be careful about letting the company enter into heavily binding agreements.
• Follow basic rules of good business practice
• Make a reservation in the board minutes against decisions that you believe may form a basis for liability
• Take out directors' and officers' liability insurance to avoid financial liability in the event of a negligent act as a director
• In serious cases - resign from the board as soon as possible

Feel free to contact us for a chat and advice about your role(s) in companies and your responsibilities in that context.