Responsibility of officials under the new Law on LLC
Authors: Max Lebedev, Partner at GOLAW and Iryna Shalinska, Associate at GOLAW
Officials of the company according to the new Law on LLC shall bear joint and several and in some cases – subsidiary liability to the company.
First of all it is important to mention that as officials under the new Law are considered members of the executive body, members of the supervisory board and other persons who are directly mentioned as in the Charter (for example, if the company established additionally other management bodies).
Officials of the company are jointly and severally liable to the company in such cases:
- for misleading of shareholders of the company regarding company’s financial status, in particular by submitting (including) of inaccurate information to the company’s documents which has led to implementation of unlawful payments of dividends – in amount of such unlawful payments that are subject to return;
- for damages caused to the company by their guilty actions or inactions – in amount of sum of damages (in this part the rule replicates already existing provisions of the Civil Code of Ukraine about responsibility of members of bodies of legal person).
What means joint and several liability? It is liability of several debtors to one creditor when such creditor has the right to make demands either on all the debtors together or on each of such debtors separately regarding performance of their obligations to pay debt in full or partially. In this case provisions about joint and several liability can be applied to officials only after their involvement in causing damages to the company or in misleading of shareholders of the company will be proven, for example, in the decision of court. In fact, such kind of claim can be filed against officials only by owners of the company, as persons whose rights have been violated, or by the company itself. That is why the possibility of bringing officials to joint and several liability totally depends on the will of shareholders and officials themselves as persons who have the right to act on behalf of the company.
Besides that, the new Law contains the provisions on non-compete, non-disclosure of confidential information and avoidance of the conflict of interests, non-compliance of which shall be an unconditional ground to terminate the labor agreement (contract) with such official without payment of compensation.
Non-compete provisions deal with separate actions solely in the field of commercial activity of the company which are restricted for officials without prior consent of the general meeting of shareholders (or the supervisory board – for members of the executive body). In particular, officials are prohibited to perform commercial activity as individual entrepreneurs, to act as participants of a full partnership or full participants of a limited partnership or to be members of the executive body or the supervisory board of other business entity in the field of commercial activity of the company.
Under the conflict of interests, the law understands conflict between the duty of official to act in good faith and reasonably in the interests of the company in general and his own private interests or interests of his affiliated persons. In this case, as affiliated persons are considered:
- business entities, if one of them exercises control over another or both are under control of a third person;
- members of the family of an individual – husband (wife), as well as parents (adoptive parents), guardians (caretakers), brothers, sisters, children and their husbands (wives);
- an individual and his family members and a business entity, if such individual and / or his family members exercise control over business entity.
In addition, it is prohibited for officials or their affiliated persons to receive any rewards or benefits associated with the performance of an official’s powers. Officials are obliged to inform the company in accordance with the procedure established by the law about each case of conflict of interests which became known to them.
Another important innovation is that the director or collegial executive body shall be obliged to inform participants on decrease in net assets value of the company by more than 50 % compared to this indicator for the previous year. For non-performance of such obligation, in the event of bankruptcy of the company during the next three years, the director shall bear subsidiary responsibility (type of liability, where the debt is charged to the subsidiary debtor in case of insufficiency of funds of the principal debtor) for the obligations of the company.
Finally, the law separates the areas of responsibility for the storage of the documents between the director (members of the collegial executive body) and the chief accountant of the company. The director is responsible for the storage of all documents of the company specified by law (in particular, minutes of the general meeting of participants and minutes of the meetings of other collegial bodies of the company, all the versions of the charter, entitling documents on the company’s property, internal regulations governing activity of the company’s bodies, etc.), except for the accounting records and financial reports, for the storage of which the chief accountant is responsible (in case of his appointment). For violation of the terms of storage of the documents the law provides administrative (if such violation is unintentional) and criminal (in case of deliberate destruction, damage or concealment of the documents) responsibility for officials.