Tightened executive liability for the company’s insolvency

An important amendment to the Business Corporations Act (hereinafter referred to as the “BCA”) came into force on 1 January 2021, tightening the liability of members of companies’ statutory bodies in case of insolvency.

It particularly stipulates an obligation to hand over remuneration from the agreement on performance of the function if the company was declared insolvent and the statutory body itself failed to file an insolvency petition (in the case of creditor insolvency petitions), including liability for the company’s debts if they cannot be repaid by the company itself.

If a member of the statutory body contributes to the company’s insolvency by breaching their obligations and if a decision on resolving the insolvency has been made in insolvency proceedings (i.e. bankruptcy has been declared or reorganisation/restructuring has been approved), based on the motion filed by the insolvency trustee it can be decided on the following:

1. the statutory body (usually the member of the board of directors or executive) must pay back all remuneration received from the company for the last two years before the insolvency proceedings were initiated;

and

1. the obligation of the member of the statutory body to pay the amount up to the difference between the sum of debts and the value of the company’s assets if the company is bankrupt, taking into account the extent to which the person has contributed to the fact that the company’s assets are insufficient to repay its debts.

The insolvency trustee files the motion to the court also if requested by the creditors’ committee.

Both of these obligations of the members of the statutory bodies will now be addressed within “incident proceedings” under the Insolvency Act, and a decision will be made by the relevant insolvency court. The decision in such proceedings can also be used to expulse the member of the statutory body from function in other companies for up to 3 years.

As a result of the current regulation, it is even more important for members of the statutory body (members of the board of directors, executives) to keep an eye on the company’s financial situation and solvency and to address any issues in a timely manner to avoid personal liability.

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Contributing Advisors