Board liability in limited companies - how to avoid the risk of personal liability if the company is struggling financially

The starting point in a limited company is that no one is personally liable for the 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, general manager and other employees.

Although the starting point is that you are not personally liable for the limited liability company's obligations/debt, board members or others involved in the company's operations may be personally liable, both criminally and financially, 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 board members or others with roles in a limited company are aware of the duties and responsibilities that are imposed on them in their 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 liable for damages for their actions. The same applies to the company's shareholders.

manager, general manager or others who have intentionally or negligently caused damage in the capacity of their role in the company.

When can you take responsibility?

There may often be special rules in the Companies Act that result in a board member becoming liable. Examples include 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 the board is aware that the company is insolvent and continues to operate at the expense of the creditors without filing for a winding-up petition or seeking measures to strengthen the company's equity.

As a board member, what can you do to avoid 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

Would you like to hear more about board liability? Advokatfirmaet Halvorsen og Co is holding a breakfast meeting on board liability in August. Stay tuned on our pages!