Managers, carefully consider your actions!
In its judgement no. III Ips 45/2017, the Supreme Court of the Republic of Slovenia considered a claim for damages filed by the company against the former members of the company’s management board. The members of the management board were accused of causing the damage to the company by establishing two subsidiaries in which the company held only a minority share, and subsequently granting a multimillion loan to the subsidiaries for the implementation of some projects, upon the completion of which the loan would be converted into the share capital of the subsidiaries.
The court of second instance ruled that the defendants’ action was not “unlawful” (i.e. contrary to the legislation in force) and as a result, it was not necessary to determine whether the defendants exercised their duty of care.
The Supreme Court rejected the view of the court of second instance and explained that relevant statutory provisions did not determine the “unlawfulness” of actions as a precondition for liability for damage. Therefore, wrongfulness (and not unlawfulness) of an act as an element of the liability for damage needs to be determined. A wrongful act is an act by the members of the company’s management and supervisory bodies when they have not acted for the benefit of the company with the care of a diligent and conscientious manager. To assess the liability of the members of the management and supervisory bodies, it is thus necessary to determine whether the persons exercised the required degree of care (as a diligent and conscientious manager) and not if their actions explicitly violated the existing legal norms.
Furthermore, the Supreme Court explained that in the case at hand the alleged actions of the defendants (establishing companies, debt-to-equity swaps, granting loans) are not prohibited by any statutory provision; however, the central issue in order to determine the defendants’ liability is whether or not they have employed the degree of care required of a diligent and conscientious manager. The Supreme Court held that the management’s decisions to establish subsidiaries and to grant them loans were unusual in this specific case. The Supreme Court explained, inter alia, that “no diligent manager … grants a multimillion loan to a newly formed subsidiary without adequate guarantees that the means will be used for specific purpose and that the borrower will repay it”.
With this judgement the Supreme Court departed from the majority case-law of the lower courts, according to which only unlawfulness of an act was determined when deciding on the liability of the members of the management and supervisory bodies for damage, and expressly stated that that the members will be held liable if they act contrary to the duty of care required of a diligent and conscientious manager.
