!Корпоративное право 2023-2024 / 2013-study-analysis_en

The second main strategy is very similar in nature. Instead of setting a legal requirement for the insolvency filing, some Member States provide for a duty to cease trading at a particular point in time where creditors’ interests are at risk.

The first regulatory strategy is clearly more widely spread. It is triggered by the insolvency of the company, rather than merely a threat of insolvency. The “wrongful trading” strategy, on the other hand, differs in so far as it does allow companies, for at least a limited time, to continue trading in a state of (balance sheet) insolvency.261 At the same time, the wrongful trading remedy can – at least in theory – be triggered even before the company is formally insolvent. The remedy is based on a realistic assessment of a company’s prospects. Thus, directors of a formally insolvent company that has a realistic chance to trade its way out of its situation may be justified in continuing the business, while directors in a not-yet insolvent company may be obliged to cease its operations where the avoidance of a (future) insolvency seems highly unlikely.

The two legal strategies clearly constitute functional equivalents, and – based on our assessment of the Country Reports and or discussions with the Country Experts – the two remedies seem to have at least similar effects on the behaviour expectations towards of directors in pre-insolvency situations.

Differences exist, however. In practice, courts mainly tend to enforce the wrongful trading prohibition in relation to companies that are already insolvent.262 This may suggests that, in practice, the wrongful trading prohibition tends to be triggered at a later stage than duties to immediately file for insolvency once the relevant triggering event has occurred.263 At the same time, however, empirical research suggests that recovery rates in the United Kingdom – a jurisdiction relying on the wrongful trading prohibition – are higher than in France and Germany – two jurisdictions adopting the “duty to file”- strategy.264

It is also worth noting in this context that most jurisdictions adopting the “duty to file”-strategy do allow the continuation of trading beyond the point where the company is balance-sheet insolvent. In addition, the rules in the examined countries also differ significantly regarding the “triggering event” that defines insolvency, which further complicates the analysis. The differences are further highlighted by the responses we received to our Hypotheticals.265

4.2 Change of directors’ duties

Summary of the country reports in tabulated form

Table 4.2.a: Change of directors’ duties

	Country		Do the core duties of directors
			change as the company
			approaches insolvency?
	Austria		no
	Belgium		no
	Bulgaria		no
	Croatia		no
	Cyprus		yes

261 See e.g. PL Davies, “Directors' Creditor-Regarding Duties in Respect of Trading Decisions Taken in the Vicinity of

Insolvency” (2006) 7 European Business Organization Law Review (EBOR) 301, 311.

262 See e.g. the analysis by T Bachner, “Wrongful Trading – A New European Model for Creditor Protection?” (2004) 5

European Business Organization Law Review (EBOR) 293-319.

263T Bachner (ibid) exemplifies this by comparing German and English law in this respect.

264See SA Davydenko and JR Franks, “Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany, and the U.K.” (2008) 63 The Journal of Finance 565-608, who examine over 2000 SME-insolvencies. See also H Eidenmüller, “Trading in Times of Crisis: Formal Insolvency: Proceedings, Workouts and the Incentives for Shareholders/Managers” (2006) 7 European Business Organization Law Review (EBOR) 239, 248.

265See Section 4.4 below.

211 Directors’ Duties and Liability in the EU

Country	Do the core duties of directors
	change as the company
	approaches insolvency?
Czech Republic	no
Denmark	yes
Estonia	yes
Finland	no
France	no
Germany	no
Greece	no
Hungary	yes
Ireland	yes
Italy	no
Latvia	yes
Lithuania	no
Luxembourg	no
Malta	yes
Netherlands	no
Poland	no
Portugal	no
Romania	no
Slovakia	no
Slovenia	no
Spain	no
Sweden	no
United Kingdom	yes

212 Directors’ Duties and Liability in the EU

Discussion

Map 4.2.a: Change of directors’ duties

	Legend	Countries
	No change	AT, BE, BG, CY, CZ, DE, EL, ES, FR, FI,
		HR, IT, LT, LU, NL, PL, PT, RO, SE, SI, SK
	Some changes in	DK, EE, HU, IE, LV, MT, UK
	core duties

In some Member States, the definition or the scope of the main duties changes as the company approaches insolvency. This is true for Denmark,266 Estonia, Hungary,267 Ireland,268 Latvia, Malta, and the United Kingdom.269 In general, this implies a change from a more shareholder-centric towards a

more creditor regarding set of objectives, or a change in the application of the general standard of care.270

The change in the duties should thus be seen, at least in part, as a consequence of our findings regarding the corporate objective (including the definition of the interests of the company) and the general scope of directors’ duties.271

266The standard of care appears to be heightened in case of decisions taken in the vicinity of insolvency.

267See the description of the factors mentioned below, section 4.4.

268Duty to consider creditors’ interests can be triggered before company is insolvent.

269Where the company is approaching (cash-flow) insolvency, the duties owed to the company (s172 Companies Act 2006) become duties to promote the success of the company for the benefit of both creditors and shareholders.

270As seems to be the case in relation to Denmark.

271See also the analysis by PL Davies, “Directors' Creditor-Regarding Duties in Respect of Trading Decisions Taken in the

Vicinity of Insolvency” (2006) 7 European Business Organization Law Review (EBOR) 301.

213 Directors’ Duties and Liability in the EU

4.3 Re-capitalise or liquidate

Summary of the country reports in tabulated form

Table 4.2.a: Change of directors’ duties

Country	Re-capitalisiation rule or mere
	duty to convene meeting?
Austria	Convene GM
Belgium	Convene GM
Bulgaria	Duty to re-capitalise
Croatia	Convene GM
Cyprus	Convene GM
Czech Republic	Duty to re-capitalise
Denmark	Convene GM
Estonia	Duty to re-capitalise
Finland	Convene GM
France	Duty to re-capitalise
Germany	Convene GM
Greece	Convene GM
Hungary	Convene GM
Ireland	Convene GM
Italy	Duty to re-capitalise
Latvia	Duty to re-capitalise
Lithuania	Duty to re-capitalise
Luxembourg	Duty to re-capitalise
Malta	Convene GM
Netherlands	Convene GM
Poland	Convene GM
Portugal	Duty to re-capitalise
Romania	Convene GM
Slovakia	Convene GM
Slovenia	Convene GM
Spain	Duty to re-capitalise
Sweden	Duty to re-capitalise
United Kingdom	Convene GM

214 Directors’ Duties and Liability in the EU

Discussion

	Legend	Countries
	Duty to convene only	AT, BE, HR, CY, DK, FI, DE, EL, HU, IE,
		MT, NL, PL, RO, SK, SI, UK, BG, CZ
	Recapitalise or	EE , FR , IT , LV , LT, LU , PT, ES , SE
	liquidate

An additional regulatory strategy at least indirectly affects the duties in the vicinity of insolvency is the so-called “re-capitalise or liquidate” rule. Throughout the European Union, the Second Company Law Directive272 provides for a duty to call a general meeting in case of a “serious loss”, which is defined as a loss of half273 of the subscribed share capital (i.e. the reduction of the company’s net assets to less than half the share capital).274

272 See now Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 54 of the Treaty on the Functioning of the European Union, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, OJ 2012 L 315/74.

273See ibid, Art. 19; Member States can also set the threshold for serious losses at a lower level, ibid Art. 19(2).

274This is assessed on a cumulated basis; see Jonathan Rickford, Reforming Capital: Report of the Interdisciplinary Group on Capital Maintenance, 15 European Business Law Review 919, 940 (2004).

215 Directors’ Duties and Liability in the EU

But while the Second Directive requires the calling of a general meeting in these circumstances, it does not require companies to take any specific action. In so far as Art 19 of the Second Directive only requires a meeting of the shareholders, the rule does not seem to follow a clear economic rationale.

First, the reference to the subscribed capital is, in itself, not a meaningful triggering event. The subscribed share capital will not be a particularly useful reference point, as this figure says virtually nothing about the assets or capital needs of a company.275 Second, even (or particular) where the event of losses amounting to more than 50% of the subscribed share capital is a significant point in time in the company’s life, it is at least questionable to rely on shareholders intervening at this point in time. In fact, to the extent that this event coincides with the company becoming significantly undercapitalised, shareholders’ incentives are distorted, since limited liability will often mean that an increase in the company’s risk profile also leads to an increase in the value of their shares.

A majority of the Member States have implemented Art 17 of the Second Directive as a mere duty to call a meeting. The interviews with the practitioners in these jurisdictions suggested that shareholders do not usually resolve on any significant matters in the general meeting called under the implementing national company law provisions. It seems, therefore, that – at least in these Member States – the rule produces costs without offering any significant benefits to companies, shareholders or creditors.

A third of the Member States, however, goes beyond this minimum requirement. These Member States require companies to choose, upon loss of half of their subscribed share capital, between either re-capitalising the company or winding down its operations and liquidating the company. This position is taken by the Czech Republic, Estonia, France, Italy, Latvia, Lithuania, Portugal, Spain, and

Sweden. The effect of the “re-capitalise or liquidate” rule on near-insolvency trading is twofold. First, it aims at making it less likely for companies with significant nominal share capital to trade in a state of capital depletion. Second, duty-related enforcement mechanisms are directly linked to this strategy, as failure to ensure that appropriate capital measures are taken at this very early stage lead to the liability of board members. Our findings suggest that enforcement of duties related to the “re-capitalise or liquidate” rule mainly happens once insolvency proceedings have been opened, but the existence of the rule may have a significant impact on directors’ incentives as the company approaches insolvency.

4.4 Other strategies

In the preceding sections, we have identified the four main legal strategies used by Member States to address the problem of inefficient risk-shifting in the vicinity of insolvency: the duty of company directors to file for the opening of insolvency proceedings; liability attached to a “wrongful trading” prohibition; changes to the content of directors’ duties as a company approaches insolvency; and the

“recapitalise or liquidate” rule. These strategies are of course complemented, in all jurisdictions, by a number of additional elements.276

As “general” duties of directors continue to apply in the vicinity of insolvency, the effectiveness of a regulatory framework will also depend on the effectiveness with which these general duties can be enforced. Since most analysed jurisdictions additionally subject managerial decisions that may have led to insolvency to scrutiny based on their general directors’ duties-framework, business decisions in near-insolvency situations are also influenced by the standards of review as well as the enforcement mechanisms applicable under the general framework. For example, to the extent that the liability of directors can be limited through the articles, and provided that such limitation remains valid in insolvency,277 the liability risk of directors may also be reduced for actions taken as the company

275 See e.g. J Rickford et al., ‘Reforming Capital: Report of the Interdisciplinary Group on Capital Maintenance’ (2004) 15 European Business Law Review 919; J Armour, ‘Legal Capital: an Outdated Concept?’ (2006) 7 European Business

Organization Law Review 5.

276This complementarity may potentially create frictions in cross-border situations, which will also be addressed in more detail in section 5.

277See section 2.7. above. Lithuania and Romania, for instance, permit a limitation of liability for certain types of conduct (but not in cases of gross negligence or intent).

216 Directors’ Duties and Liability in the EU

approaches insolvency. Likewise, the possible liability-reducing effects of the business judgement rule278 also affect the liability risks in near-insolvent firms.

A number of Member States use general civil law (especially tort law) remedies cumulatively with the directors’ duties-centred strategies mentioned above. For example Art 1382 French Civil Code provides that “[a]ny act whatever of man, which causes damage to another, obliges the one by whose fault it occurred, to compensate it.” The same is true for other jurisdictions of French legal origin such as in Belgium279 and Luxembourg.280 Countries of other legal origin also often use open-ended tort law provisions that allow for flexible interpretation and may also be applied to establish liability of directors of insolvent or near-insolvent companies. For instance the Dutch,281; German282 and Austrian Civil Codes283 contain open-ended provisions that may and have been284 used to hold directors liable in such circumstances. Moreover, such general tort law concepts also inform the interpretation of the relevant company law remedies.

These alternative remedies are typically not linked to the incorporation of the company, but follow different classifications for private international law purposes. This potentially subjects corporate directors to claims in multiple jurisdictions; this will be addressed in Section 5 below.

Apart from tort law-based remedies, Member States differ significantly in their use of criminal law sanctions in relation to conduct resulting in damages for corporate creditors. Rigid criminal law enforcement of insolvency-related misconduct by company directors often also plays a role in producing the evidence that may then be used in civil actions. From the creditors’ perspective, the advantages are, first, that the investigations producing the evidence are the publicly funded, and second that prosecutors have more powers to conduct the investigation. This is particularly relevant where criminal law mirrors, or is linked to, the relevant company and insolvency law provisions. In relation to the duty to file this is true, for instance, in Poland, where the failure to file for insolvency itself is a criminal offence.285 Based on the interviews conducted with practitioners in France, for example, the combination of criminal investigation and subsequent private enforcement of directors’ duties is of high practical relevance in small and mid-sized companies.286

Moreover, some jurisdictions require the competent insolvency administrators or liquidators to bring or examine potential claims the insolvent company may have against its directors.287 This can help overcome the problem that in most small and mid-sized companies, directors are typically also major shareholders, and will often have invested a significant portion of their available assets in the (now insolvent) firm. Thus, from a creditors’ perspective the enforcement of duties against insolvent companies’ directors will often not be economically viable, given the limited assets the defendants possess. Likewise, the evidence provided by the practitioners suggests that incentives of administrators or liquidators often play an important role: where administrators do not sufficiently benefit from bringing legal actions against company directors, even where these actions are successful, this may contribute to perceived low levels of enforcement.

Finally, the director disqualification and eligibility provisions also affect the incentives of directors in near-insolvent firms. However, the effectiveness of these remedies is to some extent inhibited by the mobility of companies across the EU, and the resulting choice of applicable company law. This problem will be addressed in section 5.2.3 below.

278See Section 2.4.3 above.

279Belgian Civil Code, arts 1382, 1383.

280Luxembourg Civil Code, arts 1382, 1383.

281See s 6:162(1): “A person who commits a tortious act (unlawful act) against another person that can be attributed to him, must repair the damage that this other person has suffered as a result thereof”.

282See s 823(2): “a person who commits a breach of a statute that is intended to protect another person” is liable for damages.

283See s 1311 of the Austrian Civil Code.

284See for example the German Federal Court of Justice (BGH), judgment of 06 June 1994, II ZR 292/91, BGHZ 126, 181.

285See s 586 of the Polish Criminal Code; see also M Zurek in M Siems and D Cabrelli (eds) Comparative Company Law – A Case-Based Approach (Oxford: Hart 2013) 45.

286See also P-H Conac in: M Siems and D Cabrelli (eds) Comparative Company Law – A Case-Based Approach (Oxford: Hart 2013) 35.

287This is true, for instance, in Spain, where claims against directors are brought in more than 80% of the cases.

217 Directors’ Duties and Liability in the EU

4.5 How and at what point in time do the remedies operate

Our findings suggest that significant differences exist in relation to the existence of special vicinity of insolvency duties as well as, where applicable, the relevant “triggering event” for such duties in the vicinity of insolvency to apply.

First, the divergence in Member States’ laws can be attributed to general differences in the applicable insolvency laws. Although all examined jurisdictions attach importance to both, balance-sheet and cash-flow insolvency, differences exist in the relative emphasis any given jurisdictions puts on these two criteria. While the general insolvency law framework lies outside the main scope of our Report, questions relating to the duties in the vicinity of insolvency cannot fully be separated from the general insolvency law framework.

Moreover, a closer examination is necessary, including in relation to those jurisdictions that do not provide for a formal change to the core duties of directors as the company approaches insolvency.288 Although most Member States do not adapt the formal definition of the behavioural standards against which to assess directors’ actions in “near-insolvent” companies, the application of the general duties may have similar effects in practice, depending on the interpretation of the legal rules by local courts.

To capture this effect and in order to gain a better understanding of the application of duties in the vicinity of insolvency, we designed a hypothetical case289 and asked our Country Experts to give us feedback on the likely outcome of a case of this nature under their national law. In addition, we used the context created through our cases to ask related questions about the rules applicable to nearinsolvent companies. The answers we have received are summarised in the table below.

As can be seen from the summary, the Member States differ in their approaches to resolving the case described, as do the likely outcomes.

The case290 involves a thinly capitalised291 company whose directors enter into a derivative contract. Under that contract, the company faces the risk of losses that would wipe out the company’s remaining equity, although the directors consider the risk to be low. Overall, the situation described involves the directors taking a business decision favourable to the company’s shareholders and potentially detrimental to creditors. Under the laws of most Member States, the actions of the directors would not result in the liability of directors.292

Table 4.4.a Answers to questions covered by Hypothetical II

Country	Do fiduciary duties	What is the relevant	Likely outcome in cases
	prevent directors	“triggering event”?	covered by H-II
	from entering into
	particularly risky
	transactions as
	the one described
	in H-II?

Austria	Yes, if there is a
	substantial risk of
	wiping out
	remaining equity.
	Based, inter alia, on
	criminal law liability
	for harming

No particular

“triggering event” referring to equity ratios or the like

Generally recognized that fewer risks may be taken once the

Given that the company is not insolvent, although weakly capitalised, at the time the decision to trade is made, and taking into account that the company’s business model is not per se unsustainable, liability under “duty to file” rules

288See Section 4.2 above.

289See Hypothetical II, Annex.

290The full text made available to our Country Experts can be found in the Annex.

291We used equity ratios of 1%, 5%, or 10%, and stated that on average comparable companies in the same line of business operate with an equity ratio of about 25%.

292Liability would, however, be likely under the laws of the Czech Republic, France, Greece, and Hungary.

218 Directors’ Duties and Liability in the EU

Country	Do fiduciary duties	What is the relevant	Likely outcome in cases
	prevent directors	“triggering event”?	covered by H-II
	from entering into
	particularly risky
	transactions as
	the one described
	in H-II?
	creditors.	company’s financial	would not apply.
		situation becomes	Directors may be liable
		“critical”.293
			depending on ex ante
		Directors should be	assessment of riskiness of the
		discouraged from	transaction. Even though they
		“gambling way out of	still had some equity cushion,
		insolvency”	they would not have been
			allowed to take a “substantial
			risk” of wiping out the
			company’s remaining equity.
Belgium	Relevant question is	Unclear whether	Disputed whether (and if, when)
	whether	duties change at all.	duty of loyalty (to act in good
	“reasonable	In any case, no clear	faith and have regard to the
	director” would have		company’s interest) changes in
		triggering event
	entered into the		the vicinity of insolvency.
		Duty to convene
	transaction		Relevant question here is
		would, however, apply
	Where business is		whether “reasonable director”
			would have entered into the
	“unreasonably”
			transaction. If so, business
	continued after
			judgement falls within the
	company is
			acceptable margin of discretion.
	insolvent, liability
	attaches based on		Company will have lost half of
	Art. 527 CC		its capital before entering into
	(enforceable by the		transaction. In case the relevant
	company/liquidator)		formalities have not been
	and Art. 1382 Civil		complied with, presumption that
	Code (enforceable		this caused damage to
	directly by any		company and creditors.
	injured party)
Bulgaria	No duty that	No specific vicinity of	Probably no liability if directors
	prevents directors	insolvency duties apart	complied with duty to convene
	from entering into	from duty to convene	the general meeting, as
	particularly risky	meeting of	company was neither cash-flow
	transactions per se,	shareholders when	insolvent nor over-indebted at
	even if thinly	equity falls below	the time of entering into the
	capitalised	registered capital or	transaction.
		where losses exceed
		25% of the registered
		capital, but no change
		of duties at that point
Croatia	No specific rules	No specific vicinity of	Duties of directors remain
	that would prevent	insolvency duties apart	unchanged despite the thin
	risky transactions in	from duty to convene	equity cushion. Thus, the
	companies with thin	meeting of	relevant question is whether the
	equity cushion	shareholders when	business decision to enter into
	Only general duty of	half of the company’s	transaction was taken with due
		share capital is lost,	care and in good faith for the
	care and business
		but no change of	benefit of the company
	judgement apply
		duties at that point
Cyprus	Possible that	Duty to convene	Unlikely that director would be
	English case law	meeting of	held liable absent fraudulent
	regarding the	shareholders when	preference vis-à-vis certain
	intrusion of creditor	half of the company’s	creditors
	interests apply in	share capital is lost,

293 See generally C Nowotny in: P Doralt, C Nowotny, and S Kalss (eds.), Commentary to the Stock Corporation Act (2nd ed; Vienna: Manz 2012) § 84 No 9.

219 Directors’ Duties and Liability in the EU

	Country	Do fiduciary duties	What is the relevant		Likely outcome in cases
		prevent directors	“triggering event”?		covered by H-II
		from entering into
		particularly risky
		transactions as
		the one described
		in H-II?
		specific	but no change of
		circumstances, but	duties at that point
		uncertain due to
		lack of case law
	Czech Republic	Application of	No clearly defined,		Directors would most likely be
		general duty of	separate concept of		liable because the application of
		care, but fact-	vicinity of insolvency		the duty of care suggests that
		specific	(but duty to convene		company’s equity cushion is too
		assessment, taking	applies)		thin for the transaction in
		into account the			question.
		company’s financial
		position
	Denmark	No specific	No clear definition of		Most likely no liability provided
		prohibition of, or	triggering event		that decision was taken bona
		restriction in relation	Case law suggests		fide and with sufficient
		to risky transaction.			information.
			that the relevant point
		However, a	in time is defined by		Danish version of the business
		generally	there not being a		judgement rule would likely
		heightened	reasonable prospect		apply
		standard of care	for saving company
		applies in thinly
		capitalised
		companies
	Finland	Application of	Duty to convene		Absent criminal conduct
		general duty of	meeting of		(dishonesty, fraudulent
		care, but situation-	shareholders when		conveyance, etc.), directors
		specific	half of the company’s		would probably not be liable
		assessment, taking	share capital is lost,		based on their entering into the
		into account the	but no change of		transaction before company is
		company’s financial	duties at that point		insolvent
		position
	France	Application of	No specific pre-		Given the circumstances,
		general duty of	insolvency duty		directors would likely be held
		care, but situation-			liable for causing insolvency of
		specific			the company in breach of their
		assessment, taking			(heightened) duty of care
		into account the risk
		involved in
		transaction
	Germany	Companies must	No specific definition		Directors are not likely to be
		not enter into	of a triggering event		held liable in the described
		particularly risky	Duty of directors to		situation, since company is not
		transactions if they			yet insolvent (albeit weakly
			keep company
		pose an existential			capitalised)
			appropriately
		risk to the company
			capitalised for activity		Directors may be liable, if
		Directors may not	pursued		assessment of riskiness of the
		enter into			transaction means that
		transactions that			company is not appropriately
		entail a substantial			capitalised for the activity
		risk of the company			pursued.
		not surviving			However, it is accepted that
					directors, even directors of
					thinly capitalised companies,
					are not under an obligation to
					act in the primary interest of
					creditors instead of the interest
			220	Directors’ Duties and Liability in the EU