Klauberg Baltics - Business in good hands.

Keep calm and carry on? Passive management may cause liability

Management did not actively cause losses, nor did it know about their underlying risks, but is now fighting to stay out of jail. The current case against the former head of the board of carmaker Audi is yet another example of inactivity leading to liability. Not being properly informed may very well constitute a breach of director’s duties, in particular if it leads to gross inefficiency by company management. Where management lacks direct or indirect control of all processes, it often does not matter whether subsequent problems are caused by bad choices or simply by not acting at all. In the context of the pandemic crisis, causing lockdowns, production stops and workplace closures, there are often but few choices left for management. But directors are well advised to keep informed about the choices that are available, and to act swiftly on opportunities. Otherwise they risk personal liability, in particular where business owners claim compensation for losses caused during the crisis.

The biggest problem in this crisis may be inertia.

To get through the crisis, the immediate reaction of most companies is to preserve their liquidity. State subsidy schemes, employment arrangements and deferred payment offers are some of the possible opportunities any company must be aware of in order to protect cash reserves. The specific dynamic of the pandemic crisis is its immediate effect on businesses, as well as swift reactions by law makers. Whereas governments in the Baltic States have put in place grant programmes almost overnight, it remains to be seen how quickly companies are able to use these to their advantage. Passive management in a severe crisis does not just mean a missed opportunity (to hoard cash), but may actually be the cause of direct losses, which the company may reclaim. Where
companies are publicly traded, they are even under the obligation to sue management for losses on behalf of the shareholders. In private limited liability companies, such as SIA, OÜ or UAB, owners should to point out to management that all opportunities must be actively explored.

Not just subsidies – but private commercial claims can also be pursued.

In addition to tracing public grants and assistance schemes, companies should now also look to improve their liquidity by enforcing commercial claims if these offer a realistic chance of success. A straightforward claim for payment against a solvent debtor should be realized through legal action unless the management is able to show why it does not follow through. Examples are claims in connection with the widespread damages cases against truck cartels, and fraud compensation claims against the makers of diesel cars Volkswagen, Audi, Škoda, Porsche, and Daimler Benz: where companies in the Baltics own a fleet of diesel cars but do not claim compensation that they most probably are entitled to according to court practice in thousands of similar cases, management will need to explain why. Management decisions entail an evaluation of risks and rewards, and legal actions are no exception.

Objectively good management.

Different opportunities arise for different companies, and the demands on management change with each situation. Directors are not required to be exceptionally responsive and knowledgeable, but it will also not be a justification to claim lack of knowledge. In today’s fast moving commercial environment, it is essential that management is able to show that their activities are based on sufficient and accurate information as well as on rational decision making. However, this also means that directors are well advised to document their decision making, introduce appropriate procedures and quality management systems, ideally audited by an independent institution. To define the duties of company directors, Latvian law refers to an orderly housekeeper as the standard to be followed in every company. The house must be kept in order so that the business may prosper, and this includes making use of all the resources available.


by Theis Klauberg Partner, Klauberg BALTICS