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Are directors liable for management decisions? - PORTUGAL

28-10-2014

PORTUGAL

 

1)      Are directors liable for management decisions?

 

Directors may be held liable for losses and damages sustained by the company, the creditors, the shareholders or third parties as a consequence of the breach of his/her legal or contractual duties as a Director.

 

Under Portuguese Company Law, Directors are subject to two general duties – the duty of care (by demonstrating willingness, technical capability and an understanding of the business of the company that are appropriate to the performance of their functions and by using the diligence that may reasonably be expected from a careful and organised Director) and the duty of loyalty (namely, not competing with the company, avoiding conflicts of interests, not to use corporate opportunities or business information, confidentiality, etc.).

 

Portuguese Company Law provides also for specific duties that Directors must comply with in the course of performance of their powers and duties as Director, such as, for example: the duty to prepare the Annual Accounts and to submit them to the Auditors and to the Shareholders in a timely manner, the duty to convene the General Meeting of Shareholders whenever the Company’s Accounts show that the company has capital impairment problems, etc.

 

Liability of a Director is joint and several with any other Director who is or may be held liable for the same act.

 

2)      What are the general criteria for being liable? Ex. To cause a damage, to act with minor or soft guilt, imprudence, negligence, bad faith, fraud, malice…)

 

a)     Liability vis-à-vis the Company:

 

Directors may be held liable for any loss or damage sustained by the company as a consequence of the breach by the Director of any of his/her legal or contractual duties unless they can prove the absence of wilful or negligent misconduct.

 

This means that, whenever such a situation occurs, the law presumes the misconduct of Directors therefore establishing that the burden of proof lies with the Directors.

 

Liability may however be excluded under the so-called “business judgement rule” if the Directors prove that the concerned business decision was made (i) on an informed basis, (ii) without any conflict of interests and (iii) in accordance with reasonable business criteria.

 

Liability of a Director towards the company may also be excluded (i) when the director has voted against the decision or did not participate in the decision-making process or (ii) when the decision was based in a shareholders resolution (provided that such resolution is not null and void).

 

It is important to emphasise that if the company fails to claim for damages and losses from the Directors, the creditors of the company can do it themselves, on behalf of the company.

 

b)    Liability vis-à-vis the Shareholders and third parties:

 

Directors may also be held liable for losses and damages sustained by the shareholders and third parties provided that the latter demonstrate the Directors’ wilful or negligent misconduct.

 

Again, Directors’ liability may be excluded under the “business judgement rule”, or if the relevant act or omission was based in a resolution passed at a Shareholders General Meeting, or in relation to Directors who have not participated in the decision or who voted against it and recorded their negative vote.

 

c)     Liability vis-à-vis the Creditors:

 

Directors may be held liable to the company’s creditors if the latter succeed in demonstrating that the assets of the company have become insufficient to meet their debts as a consequence of a wilful or negligent misconduct of the Director that breaches the legal rules protecting the creditors (such as the capital impairment rules or the rules imposing restrictions on the distribution of assets and profits).

 

Here again, the “business judgement rule” may apply excluding the Directors’ liability and the liability may also be excluded when the Director has voted against the decision or did not participate in the decision-making process.

 

However, liability in relation to the company creditors cannot be excluded on the grounds that the decision was based in a shareholders resolution.

 

3)      Can the directors be directly liable for company debts in front of the company’s creditors without proving that directors have been guilty? In which cases?

[For example in certain jurisdictions, directors are directly liable in front of the creditors of the company when they are obliged to promote the dissolution of the company and they do not do it in the required time, in certain cases, for example when losses accumulated imply that the net asset are less than half of the issued capital.]

 

Directors may be held liable to the company’s creditors if the latter succeed in demonstrating that the assets of the company have become insufficient to meet their debts as a consequence of a wilful or negligent misconduct of the Director that breaches the legal rules protecting the creditors (such as the capital impairment rules or the rules imposing restrictions on the distribution of assets and profits).

 

Liability may however be excluded under the so-called “business judgement rule” if the Directors prove that the concerned business decision was made (i) on an informed basis, (ii) without any conflict of interests and (iii) in accordance with reasonable business criteria.

 

Liability may also be excluded when the Director has voted against the decision or did not participate in the decision-making process. However, liability in relation to the company creditors cannot be excluded on the grounds that the decision was based in a shareholders resolution.

 

4)      Can the directors be liable in case of insolvency of the company? Is this situation of responsibility frequent in your insolvency cases?

 

Directors have the obligation to apply for a Court declaration of insolvency of the company within 60 days from the date in which they become aware, or should have become aware, of the company’s insolvency.

 

If Directors fail to apply for insolvency in the above mentioned terms, they may be held liable for losses and damages. Directors may also be criminally liable if such failure is due to wilful or negligent misconduct.

 

Moreover, under Portuguese law, whenever a company is declared insolvent the Court has to evaluate the circumstances that caused the company’s insolvency and has to rule whether or not the insolvency was caused by wrongful misconduct of the company’s Directors.

 

The insolvency shall be deemed as wrongfully caused by the debtor or the company’s Directors whenever the insolvency situation has been created or aggravated as a result of the intentional action or serious misconduct of the debtor or its Directors, in the 3 years prior to the beginning of the insolvency proceedings.

 

Although Portuguese Insolvency Law is quite detailed as regards the causes and consequences of the insolvency, namely, in which concerns the company’s Directors liabilities, there are not many court cases where Directors have been convicted for wrongful misconduct and for having created or contributed to the company’s insolvency situation.

 

5)      Are directors liable in the case of closing business without filing for insolvency?

 

In case of dissolution of the Company the Directors may be held liable for losses and damages sustained by the creditors, the shareholders (individually) or third parties as a consequence of the breach of his/her legal or contractual duties which may have occurred until the date they ceased functions and/or the company is considered dissolved.

 

6)      Do you have a specific action to sue a Director when he/she produces damages not to the company but to the creditors or shareholders? Is this legal action successful for recovering the damage suffered by the claimant?

 

Mindful of the regime described above both shareholders and creditors may bring an action for civil liability in order to recover the damage suffered. The court decision awarding damages will have to be enforced by means of a specific enforcement procedure (‘acção executiva’), and eventual seizure of assets belonging to the Director.

 

7)    Can other persons than directors /board members be liable? Ex. Managers, officers

 

According to the Portuguese Company Law the provisions regarding the liability of directors apply to other persons who are entrusted with managing functions.

 

 

 

8)      What do you estimate would be the expected time for obtaining an enforceable judgment in a legal action before Court against the directors? For example a temporary enforcement pending of Court of Appeal decision.

 

The time for obtaining an enforceable decision would depend on several factors, namely the type of evidence to be presented before the Court. However one should expect no less than 2 years for a temporary enforcement pending a Court of Appeal decision.

 

9)      Is it feasible / convenient to include in the by-laws of the company the arbitration clause for claiming to directors? What is the expected time for the arbitration award?

 

It is doubtful, in light of Portuguese law, that such an arbitration clause would be enforceable against the Directors.

 

Arbitration procedures are normally faster than common court cases, however, tend to be more expensive.

 

10)   What are the expected fees and costs for a law suit like this?

 

The claimant pays up front fixed court fees which depending on the amount in dispute may vary between EUR 102.00 and EUR 1,632.00. Subsequently, the Court establishes additional fees, which vary depending on the length of the case and the number of hearings and other court proceedings.

 

11)   What is/are the usual system/s for estimating the fees? Ex. Hourly rate, cap fixed budget, success fee – quota litis.

 

Normally the method for estimating the fees results from a combination of the hourly rate and success fee systems.

 

The quota litis systems is not allowed under Portuguese law.

 

 

Teresa Nogueira

Partner

teresa.nogueira@cncm.pt