Directors' Duties and Liabilities

Paul J. Omar

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351746779
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

This title was first published in 2000. The law relating to directors' duties has fundamental implications across the business environment and yet few areas of business law have received so little detailed examination. This text provides fresh and incisive insights to the rules applying in ten major economic jurisdictions within Europe, with respect to directors' legal obligations and liabilities. Written by the foremost figures in the field, each contribution outlines the statutory provisions that affect the work of company directors in each jurisdiction, including general legislation and specific laws covering the status of incorporated bodies. Fully illustrated with case-law examples the book provides a guide to the range of measures which national courts may provide for participants in corporate life seeking remedies for unsatisfactory governance of companies. It also features guidance on the specific bases for criminal and civil liabilities and examples of the range of penalties to which directors might be subject. The result is a work of unprecedented detail which will be welcomed by practitioners in the corporate sector, academics and researchers alike.

1
Austria

DR FRIEDRICH SCHWANK

Introduction

The law relating to the duties and obligations of directors in Austria is contained in a number of laws. The most significant of these are the Limited Liability Companies Act,¹ the Stock Corporations Act,² the Commercial Code³ and the Civil Code.⁴

In addition to these laws, there is a considerable amount of other legislation containing specific duties and obligations of directors relating to certain activities, for example, those that contain provisions imposing duties and liabilities on directors for the activities of the company in relation to environmental matters. This outline does not attempt to provide information on these specific duties, but rather on the general duties and liabilities of directors.

In Austria, the system of corporate governance is in many ways significantly different from that in common law countries. Many limited liability companies⁵ are governed by a single tier system of management (the law permits limited liability companies to be incorporated with one or more directors). However, there are many companies, for example stock corporations⁶ and the larger limited liability companies, which have a two-tier system of governance. This system provides for a board of directors, which is responsible for executive decisions and governance of the company, and a second board whose duties are those of supervision of the board of directors in the ordinary course of the company’s business and ensuring compliance with company rules.

The types of duty and standard of care required of directors and supervisory board members are different. The actions of a director may not result in any liability on the part of the supervisory board. Furthermore, the actions of the supervisory board may relieve a director of any liability to which he might otherwise have been subject. For that reason, in this outline, the position of directors and supervisory board members will be considered separately.

Directors

Duties

Diligence The principal duty governing the actions of all company directors in Austria is that imposed by section 25 of the Companies Act which requires a director, when carrying out his duties, to act with the care of a diligent, prudent businessman having regard to the line of business of the company. The standard of care set by this section is central to other duties required from directors and the degree of expected care in the exercise of those duties.

Managing the business of the company It is the duty of the directors to manage the business of the company. If more than one director is appointed, under section 21(1) of the Companies Act they run the business together and all decisions must be made unanimously. This means that, although the directors may allocate amongst themselves specific duties or the articles of association of the company may provide for such an allocation, they are still required not only to perform their own specific duties but also supervise and check the performance of those duties allocated to other directors. Furthermore, as decisions of directors must be unanimous, should any directors disagree with the decision of a director who has been allocated a specific duty, that director may not carry out any decision until unanimous agreement has been reached.

There are certain limitations on the powers of directors in managing the business of the company. For example, they are bound by the decisions of the shareholders as a whole, although not individually. An exception exists in the case of stock corporations when directors are subject only to powers exercised by the supervisory board. Certain transactions may only be entered into with the consent of the supervisory board, where one exists, including major investments, the acquisition or sale of interests, business or real estate and the establishment or closure of branches. Other decisions require the approval of the shareholders, including the granting of an authority to act for the company in commercial matters,⁷ this being an important and potentially powerful authority in Austria, and a call on unpaid initial capital contributions. The directors may also be limited by specific provisions contained in the articles of association.

The position of third parties Any restrictions on the powers of the directors are only relevant internally. With respect to third parties, directors are regarded as having unrestricted capacity to represent the company, including the capacity to sell the company and to buy and sell real property. Breaches of the internal restrictions imposed on directors may result in the director in default being liable in damages but do not affect the validity of the transaction as regards external parties. It is only in cases where the third party knew that the director was acting outside of his authority that the transaction will be declared null and void

Keeping proper books Directors are under a statutory duty under section 22(1) of the Companies Act to ensure that the company keeps all necessary books of records and accounts for the company.

Non-competition It is a basic principle of Austrian company law that a director is required to show a high degree of loyalty and responsibility to the company he manages. Thus, as a general rule, directors are not permitted to compete with the company. Section 24(1) of the Companies Act states that directors may not enter into transactions in the same line of business, either for themselves or on behalf of third parties. Furthermore, they may not have a personal interest in, or be a director or a member of the supervisory board of, a company in the same line of business. The only exception to these restrictions is where the company, i.e. the shareholders as a whole, gives its consent either in the articles of association or by way of a resolution passed at a general meeting of shareholders.

Confidentiality Another basic principle of Austrian company law is that directors are subject to a strict duty of confidentiality with regard to company affairs.

Insolvency The directors must ensure that there is a true and proper accounting of the business of the company. In particular, if the directors are, or should be, aware that the company’s liabilities exceed its assets they have a duty to file a petition for bankruptcy promptly.

Liability

As stated above, the central principle of the responsibility and liability of directors is that they must act with the care of a diligent, prudent businessman. The directors are jointly liable for any damage suffered as a result of any breach of this duty. The onus is on the directors to establish that they have complied with the requirements of this duty. Any breaches may result in civil and/or criminal sanctions.

In principle, the duty of diligence is owed to the company and thus it is the company that may enforce those duties or sue for damages resulting from any breaches of those duties. There are, however, circumstances in which individual shareholders or classes of shareholders as well as third parties may enforce their rights directly against the directors.

Actions by the company Section 25(3) of the Companies Acts lists specific examples of when directors will be held to be in breach of their duty to act diligently. These include:

• where a director, contrary to the provisions of the Companies Act or the articles of the company, distributes assets of the company; and
• where a director makes payments out of company funds after the date on which the directors were required by law to petition for bankruptcy.

It is also accepted that a director will be held liable for any damages resulting from giving false information at the time of the company’s incorporation or in relation to any increase in the company’s capital. A director is liable to pay damages if he enters false information on the register of shareholders. Liability also arises for any breaches of anticompetition provisions contained in section 24 of the Companies Act resulting in loss to the company. In order to establish liability, the requirements are that the director has breached a duty to act with the care of a diligent businessman and that in doing so he has acted deliberately or negligently. Gross negligence does not have to be proven for liability to arise. The amount of damages payable is equivalent to the amount of profits lost by the company.

Generally, the liability of a director is neither reduced nor mitigated by the concurrent liability of any other officers in the company, for example, members of the supervisory board. Even if a shareholder has himself participated willingly in the decision-making procedure within the company which is also in breach of the director’s duties, this will not reduce the liability of the director to compensate for the whole of the damage suffered. It is only where the shareholders as a whole, or an executive body such as a supervisory body appointed by the shareholders with authority to issue directives, have participated in the breach and where the director can establish contributory liability on the part of those shareholders or that body, that director will be able to rely on contributory liability to meet any claim by the company and thereby reduce his own liability. The limitation period for claims under section 25 is five years.

Actions by individual shareholders As stated above, the directors are in most cases not directly liable to the shareholders individually. There are, however, some exceptions. One exception is where individual shareholders suffer damage as a result of the merger of a limited liability company with another company, whether a limited liability company or a stock corporation, or as a result of an acquisition. Another exception arises where directors cause damage to individual shareholders as a result of a deliberately false representation of the state of the assets of the company in minutes of meetings, annual accounts, balance sheets, management reports or in a prospectus.

Directors are also liable to compensate shareholders in cases where a breach of their duties would generally result in individual shareholders suffering damage. This refers to breaches of duties imposed where the intention is to protect assets and the equity participation of shareholders. Examples of these duties are:

• equality in the distribution of profit;
• notifying shareholders of general meetings;
• serving copies of extracts from the minutes book;
• entering shareholders on the register of shareholders; and
• complying with all proper requests to inspect the books of the company.

A director found liable for breaching any of these duties will be liable to compensate the shareholder directly for any losses suffered by him as a direct consequence of that breach.

Actions by third parties In principle, it is not possible for third parties to make claims directly against a director. Any damages suffered as the result of a breach by a director of his duties, whether under a statutory obligation or imposed by the articles of association, are recoverable only through the company. Third parties enjoy a lien over the claim by the company against the director. Nevertheless, there are exceptional cases where a third party may sue the director directly. These include cases where false announcements concerning a reduction in the capital of the company have been made or a failure to give notification of capital contributions has occurred.

Furthermore, a claim may be made against a director in relation to breaches by the company of anti-competition rules if the director has committed the offence himself or actively participated in the commission of the offence. A claim may also be made in insolvency cases where a creditor suffers loss as a result of a director failing to file a bankruptcy petition in due time or where the director has caused the company to enter into a transaction with a third party knowing that the company was insolvent at the time.

A director will also be liable for any losses suffered by a third party if he does not make it sufficiently clear at any time that he is acting on behalf of the company, for example, by failing to include the company name with his signature in any correspondence or contracts.

Criminal sanctions In addition to sanctions imposed by ordinary civil law rules, some breaches by directors of their duties can result in criminal sanctions. The Criminal Code⁸ contains penalties for offences such as embezzlement, acceptance of bribes and fraud. The Companies Act also contains criminal penalties including imprisonment of up to two years or a fine for certain actions by directors including:

• making false statements concerning the company;
• deceiving the auditors of the company;
• making false statements in the companies annual reports; and
• making false statements in documents lodged with the Companies Registry.

Supervisory Board Members

General Information

The formation of a supervisory board is required in the case of larger limited liability companies where the company has more tha...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Editorial
• Editor’s Preface
• Notes on Contributors
• Note on The Association of European Lawyers
• 1. Austria
• 2. Belgium
• 3. England and Wales
• 4. France
• 5. Germany
• 6. Italy
• 7. The Netherlands
• 8. Portugal
• 9. Spain
• 10. Switzerland
• Index