Shareholder liability when a Lithuanian company goes bankrupt

Written by attorney-at-law Tadas Ugintas.

The Supreme Court of Lithuania examined a case concerning a shareholder’s liability for failing to start the company’s insolvency proceedings in time.

The key question was from when a shareholder can be treated as having known, or as having had to know, that the company was insolvent. This moment matters for deciding whether the shareholder breached the duty that applied at the time, and for which period’s damage he or she could be liable.

The lower courts held the company’s former director and its sole shareholder jointly and severally liable for the damage caused to creditors.

They relied on the fact that the company had been insolvent for some time, but insolvency proceedings had not been started in time. The shareholder was also held liable because she had not taken an interest in the company’s business and financial position.

The Supreme Court of Lithuania held that this assessment was not sufficient.

A director and a shareholder may learn of a company’s insolvency at different times. The director organises the company’s business, is responsible for its accounts and must monitor its financial position continuously. That is why the director is usually the first to know, or the one who should know, about solvency problems.

A shareholder does not usually have such day-to-day management duties.

The court stated that in each case it must be established when the particular shareholder:

• actually learned of the company’s insolvency; or
• given his or her position and rights, should have learned of it.

Relevant factors include:

• how many shares the person held;
• whether he or she was a majority or minority shareholder;
• whether he or she was actively involved in the company’s business;
• whether he or she acted as a de facto director or employee;
• whether he or she had a real opportunity to obtain the company’s financial information;
• when the company’s annual financial statements were due to be approved.

A shareholder who is actually involved in running the company may learn of its insolvency earlier. But simply holding shares passively does not in itself show that the shareholder knew of the company’s financial position.

The court explained that under the rules in force at the time, a sole shareholder had a minimum duty to take an interest in the company’s business.

Unless it is established that the shareholder actually knew of the insolvency earlier, the relevant reference point could be the date by which the ordinary general meeting had to be held and the previous year’s financial statements approved.

A sole or majority shareholder cannot avoid all possible consequences simply by not calling the mandatory meeting and not looking at the financial statements. But his or her liability cannot automatically be counted from the same date as the director’s either.

The lower courts had not established when the shareholder actually learned, or should have learned, of the company’s insolvency.

Without establishing that moment, it was not possible to decide precisely:

• when the shareholder breached the duty that applied to her;
• for which period she could be liable;
• how much damage could be awarded against her;
• whether her period of liability coincided with the director’s.

The Supreme Court therefore set aside the part of the appeal court’s ruling concerning the shareholder’s liability and sent that part of the case back for fresh examination.

The ruling confirms that a shareholder’s liability cannot be based only on the date of the company’s insolvency or on a general statement that the shareholder should have taken an interest in the company’s business.

The court must establish, for each shareholder individually, the moment when he or she knew or should have known. If the director should have known about the insolvency earlier, the shareholder’s possible period of liability may be shorter.

This ruling interpreted provisions of the Law on Enterprise Bankruptcy in force until 2016, under which the duty to start insolvency proceedings in certain cases also lay with the owner of the company.

Under the current Law on Insolvency of Legal Entities, the duty to start insolvency proceedings for an insolvent legal person lies directly with its head (director), and where insolvency becomes apparent during liquidation, with the liquidator. The ruling’s interpretation therefore cannot be applied automatically to current situations without assessing the law in force and the specific circumstances.

If a claim is brought against you as a former director or shareholder of a Lithuanian company, it is important to establish separately which period the dispute concerns, which legal rules applied at that time and when you actually learned of the company’s financial position. This is particularly relevant for foreign shareholders who had little day-to-day involvement in the Lithuanian company.

Supreme Court of Lithuania: civil case No. e3K-3-286-421/2018.

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