7 THINGS TO KNOW ABOUT A BOARD MEMBER’S PERSONAL LIABILITY

It might be prestigious, but certainly not easy nowadays to be a board member in a Latvian company… Especially in a situation where the business is incurring losses or has already gone bankrupt.

You are probably already aware of the presumption of innocence, aren’t you?

“No one can be found guilty of committing a crime and punished until their guilt has been proven in the manner prescribed by law and recognized by a court judgment that has entered into legal force. The defendant does not have to prove their innocence. All doubts about the defendant’s guilt must be interpreted by the court in favor of the defendant.”

Forget about it! With board members, it’s a completely different situation. They are only exempt from liability if it is proven that in the given situation, they made the most advantageous decision for the company at that moment. This isn’t even about whether there was intentional malice or not.

#1 Insolvency Administrator Can Recover Damages

Article 169 of the Commercial Law of the Republic of Latvia stipulates that a board member must perform their duties as a diligent and careful manager. The primary task of a board member is to manage the company, make decisions related to the company’s economic activities, and its future development.

Therefore, it is often difficult to predict how each specific decision might affect the company’s future operations, as the board relies on subjective views and experience when making decisions. All business activity, especially that of the board, involves a certain degree of risk.

The letter of the law implies that a board member is held responsible for mistakes that any other diligent and careful manager might have made. This means: if a board member’s actions have led the company to insolvency and insolvency proceedings have been initiated, then the administrator is entitled to file a lawsuit against the specific board member and ask the court to recover the damages caused to the company. This article is very often used to take action against board members for their decisions.

#2 All Company Board Members Are Jointly and Severally Liable

In commercial companies with multiple board members, all are jointly and severally liable – for example, the State Revenue Service (SRS) imposes administrative fines for not submitting annual reports within the specified deadlines, according to the Administrative Violations Code of the Republic of Latvia, on all board members, not just one.

For example, if the fine is EUR 140 and the commercial company has three board members, all three will be fined EUR 140.

#3 SRS-Assessed Fines Can Be Recovered from a Board Member

A claim can be brought against a board member for legal violations if these actions resulted in damages to the company. In a legal state, a situation where a natural person deliberately carries out illegal activities under the guise of a legal entity, without taking responsibility for damages caused to third parties, cannot be accepted.

When performing any activity, the company has an obligation to comply with laws, therefore, board members, whose duty it is to manage the company, also have an obligation to ensure that the company does not violate the provisions of laws and regulatory acts.

The company must comply with the Law “On Accounting,” the Labor Law, tax laws, the Commercial Law, etc. If the board, while managing the company, manages to violate any of the provisions of laws and regulatory acts, and as a result, the company incurs losses, the board member is personally responsible for such actions.

For example, if a board member fails to comply with, or more precisely, fails to ensure the provisions of Article 2 of the Law of the Republic of Latvia “On Accounting” regarding the company’s obligation to properly maintain accounting records and preserve original documents supporting economic transactions, and due to this non-compliance, the State Revenue Service obliges the company to make payments, the board member may be required to compensate the company for the damages incurred – the amount specified in the SRS decision that the company must pay into the state budget.

#4 Compensation for Damages from Questionable Transactions May Be Demanded

Board members are responsible not only for violations of laws and regulatory acts but also for actions that formally comply with the law but are not financially beneficial to the company. This is stipulated by the Commercial Law.

Based on this law, claims can be brought against a board member for actions that are formally compliant with the law, for example, selling property, entering into a contract, or failing to take certain actions, such as not filing a claim, which is unreasonable, not economically beneficial, very risky, or otherwise causes losses to the company.

However, an action that at first glance seems uneconomical is not always so. For example, not filing a claim against a company’s debtor to recover funds could be considered an uneconomical action, but if the debtor is actually insolvent, filing a claim might only incur additional expenses and yield no financially positive result.

#5 Tax Debt Exceeding 21.5 Thousand Can Be Recovered Personally

Since January 1, 2015, amendments to the law [“On Taxes and Fees”,
](http://likumi.lv/doc.php?id=33946) have been in force,

which granted the State Revenue Service (SRS) the right to recover the company’s tax debt from its board members, if these tax debts arose while the person was a board member and all the listed criteria are met:

1. the amount of tax debt exceeds 50 minimum wages (currently – 21,500 euros);
2. the decision on the recovery of overdue tax payments has been notified to the company;
3. after the tax debt arose, the company alienated its assets to related parties (as defined by the Insolvency Law);
4. the State Revenue Service has drawn up a report on the impossibility of recovering the tax debt from the company itself;
5. the company’s board has not fulfilled its obligation under the Insolvency Law to submit an application for the insolvency process of the legal entity.

For the SRS to have the right to initiate proceedings against a board member, all the aforementioned circumstances must be established. Within three months from the date of drawing up the report on the impossibility of recovery, the SRS warns the legal entity and the respective board member or board members about the initiation of the process. The board member has the right, within one month of receiving the warning, to submit documents to the SRS proving that the specific board member is not responsible for the legal entity’s overdue tax payments.

#6 Insolvency Administrator Can Annul Transactions

As of January 2015, if a company is declared insolvent, the insolvency administrator is obliged to evaluate the validity of the company’s transactions in accordance with Article 96 of the Insolvency Law.

If the administrator determines that within 3 years before the commercial company was declared insolvent, transactions were carried out that led the commercial company to insolvency, the administrator is entitled to apply to the court and request the annulment of the transaction and for the board member to compensate the company for the damages incurred. Several such cases have been experienced.

#7 Liability for “Lost” Documents

The legislator is looking for possible options to reduce dishonest entrepreneurs and, unfortunately, this creates additional stress for honest entrepreneurs.

Since March 1, 2015, amendments to the Insolvency Law have been in force, which establish a mandatory requirement that board members must observe.

Namely, board members of an insolvent commercial company must personally answer for creditors’ claims if accounting documents are not handed over to the administrator or if they are such that they do not allow for a clear understanding of the debtor’s transactions and financial situation in the last three years before the declaration of insolvency proceedings.

This means: if there are no accounting documents proving the validity of transactions, the administrator may assume that the board member or board members acted unlawfully and misappropriated the company’s assets, as a result of which the commercial company became insolvent. Accordingly, in such a case, the board members will have to compensate the company’s creditors for the damages incurred from their own funds.

If You Don’t Want to Take Risks

If, after reading all this, your desire to start a business decreases or you start considering attracting a Bulgarian citizen to the position of a board member, we can reassure you – so far, there have been no cases of tax debts personally recovered from board members. However, caution is advised.

And one more thing… I recommend documenting the course of board meetings and the decisions made. Just in case.

There is always the option to resign from the position of a board member. Another option to avoid liability is to insure your civil liability in case of damages.

May you have endurance in holding the honorable position of a board member!

P.S. If you don’t mind, in the next letter I will explain how to actually assess the reliability of your business partners to avoid “running into” VAT surcharges from the SRS.
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