Liability of a management board member in Estonia

What does the diligence of a prudent entrepreneur mean?

A board member of an OÜ must perform their duties with the diligence of a prudent entrepreneur (ÄS § 187 lg 1) [1]; the same requirement applies to a board member of a public limited company (aktsiaselts, AS) (ÄS § 315 lg 1) [4]. As a general rule of the General Part of the Civil Code Act (tsiviilseadustiku üldosa seadus, TsÜS), members of a legal person's management body must perform their duties with the care normally expected of such a member and be loyal to the legal person (TsÜS § 35) [5].

The management board represents and manages the company (ÄS § 180 lg 1) [2]. If the company has a supervisory board (nõukogu), the management board must follow its lawful orders and may enter into transactions beyond the scope of everyday business only with its consent; this restriction does not apply to third parties (ÄS § 180 lg 4) [2]. The management board must give the supervisory board an overview of the company's business at least once every four months and immediately report any significant deterioration of its economic situation (ÄS § 180 lg 5) [2].

According to the Supreme Court (Riigikohus), a breach of the duty of diligence may be, for example, the sale of the company's immovables on unfavourable terms (RK 2-14-50307/132) [6].

The burden of proof matters: a board member is released from liability only if they themselves prove that they performed their duties with the diligence of a prudent entrepreneur (ÄS § 187 lg 2) [1].

To whom is a board member liable?

• To the company. Board members who have caused damage to the company by breaching their duties are jointly and severally liable for compensating it (ÄS § 187 lg 2) [1].
• At a creditor's request. A creditor of the company may also demand that the damage be compensated to the company if the creditor cannot satisfy its claims from the company's assets (ÄS § 187 lg 4) [1]. In deciding such a derivative claim, the court must assess the company's financial position and solvency; no enforcement instrument is needed for the claim to be granted (RK 2-21-13629/118) [7]. The creditor may bring the claim even if the company has waived it, concluded a compromise with the board member or shortened the limitation period (ÄS § 187 lg 5) [1].
• In bankruptcy. Once the company's bankruptcy has been declared, only the trustee in bankruptcy (pankrotihaldur) may bring the claim on the company's behalf (ÄS § 187 lg 4) [1]. A creditor's action already pending in court does not end: the trustee may take the claimant's place, the compensation goes into the bankruptcy estate, and if the trustee does not join, the creditor may continue the proceedings (RK 3-2-1-8-17) [8].
• Directly to a creditor. The duty of diligence under ÄS § 187 lg 1 protects the company, not its creditors, so a creditor cannot claim compensation for itself in tort because of its breach (RK 2-14-50307/132) [6]. A board member's liability in tort towards a creditor is exceptional and may arise if they caused damage by intentional conduct contrary to good morals (RK 2-21-13629/118) [7].

When does a claim against a board member expire?

The limitation period for a claim against a board member is five years unless the articles of association or an agreement with the board member provide for another period (ÄS § 187 lg 3) [1]. The period runs from the breach of duty: the limitation period for a claim against a member of a legal person's management body is five years from the breach of duty (TsÜS § 37 lg 4) [9].

The Supreme Court has explained that the company's claim against its board member starts to expire from the breach of duty, not from when the trustee learned of the damage, and that relying on limitation does not become contrary to good faith even where the company is controlled by one person (RK 2-22-6487/73) [10].

What must the board do if the company is insolvent?

Under the Bankruptcy Act (pankrotiseadus, PankrS), a debtor is insolvent if it cannot satisfy a creditor's claim that has fallen due and this inability is not temporary (PankrS § 1 lg 2) [11]. A debtor that is a legal person is also insolvent if its assets do not cover its obligations and this situation is not temporary (PankrS § 1 lg 3) [11].

• If insolvency is likely, the board must take steps to overcome the economic difficulties, including considering a reorganisation petition (saneerimisavaldus) (ÄS § 180 lg 5¹) [2].
• If the company is insolvent and this is not temporary, the board must file a bankruptcy petition with the court immediately, but no later than 20 days after the insolvency becomes evident (ÄS § 180 lg 5¹) [2].
• Payments after insolvency becomes evident are prohibited, except those consistent with the diligence of a prudent entrepreneur; the board members must jointly and severally compensate the company for other payments (ÄS § 180 lg 5¹) [2].

According to the Supreme Court, this duty protects creditors against damage caused by continuing business when there are grounds for filing a bankruptcy petition (RK 2-14-50307/132) [6]. Knowingly damaging the debtor's financial position in breach of duty by a member of its management body, causing a significant reduction in solvency or insolvency, is an offence under the Penal Code (karistusseadustik, KarS), punishable by a fine or up to three years' imprisonment, but only if the court has declared bankruptcy or terminated the bankruptcy proceedings by abatement (raugemine) (KarS § 384) [12].

Is a board member liable for the company's tax debt?

Under the Taxation Act (maksukorralduse seadus, MKS), a legal representative must organise the timely and full performance of the represented person's tax obligations; monetary obligations are performed from the represented person's assets (MKS § 8 lg 1) [13]. If they breach this duty intentionally or through gross negligence, they are jointly and severally liable with the taxable person for the resulting tax debt (MKS § 40 lg 1) [3]. Gross negligence is failure to exercise the necessary care to a significant extent (VÕS § 104 lg 4) [14].

According to the Supreme Court, the tax debt must have arisen because of the breach of duty, and the fault of each board member must be established separately (RK 3-3-1-43-14) [15].

To collect a tax debt from a board member, the tax authority issues a liability decision (vastutusotsus) (MKS § 96 lg 1) [16]. It may do so only after collection from the company has started and the debt could not be collected within three months, or if the company has been declared bankrupt (MKS § 96 lg 5) [16]. The payment deadline in the decision may not be shorter than 30 days from its delivery (MKS § 96 lg 3) [16]. A person convicted of a tax offence is jointly and severally liable with the taxable person for the tax debt caused by the offence (MKS § 41 lg 1) [17].

What the law says

• „Juhatuse liige peab oma kohustusi täitma korraliku ettevõtja hoolsusega.“ [1] (translation: a management board member must perform their duties with the diligence of a prudent entrepreneur; ÄS § 187 lg 1) – this is the basis of a board member's liability.
• „Juhatuse liige vabaneb vastutusest, kui ta tõendab, et on oma kohustusi täitnud korraliku ettevõtja hoolsusega.“ [1] (translation: a board member is released from liability if they prove that they performed their duties with the diligence of a prudent entrepreneur; ÄS § 187 lg 2) – the board member must prove diligence.
• „Kui on ilmne, et juriidiline isik on püsivalt maksejõuetu, peavad juhatuse või seda asendava organi liikmed esitama pankrotiavalduse.“ [18] (translation: if it is evident that a legal person is permanently insolvent, the members of the management board or the body replacing it must file a bankruptcy petition; TsÜS § 36) – a duty, not an option.
• „Juhtorgani liige ei vastuta, kui ta tegutses vastavalt juriidilise isiku üldkoosoleku või muu pädeva organi õiguspärasele otsusele.“ [9] (translation: a member of the management body is not liable if they acted in accordance with a lawful decision of the general meeting or another competent body of the legal person; TsÜS § 37 lg 1).
• „vastutab ta selle tõttu tekkinud maksuvõla eest solidaarselt maksukohustuslasega“ [3] (translation: they are jointly and severally liable with the taxable person for the resulting tax debt; MKS § 40 lg 1) – in case of an intentional or grossly negligent breach.

What to do

1. Make decisions deliberately and keep their basis (analyses, offers, supervisory board consents): to be released from liability, you must prove the diligence of a prudent entrepreneur yourself (ÄS § 187 lg 2) [1].
2. Keep a constant eye on the company's financial position. If insolvency is likely, take steps to overcome the difficulties and consider a reorganisation petition (ÄS § 180 lg 5¹) [2].
3. If the company is insolvent and this is not temporary, file a bankruptcy petition with the court immediately, but no later than 20 days after the insolvency becomes evident, and make no payments inconsistent with the diligence of a prudent entrepreneur (ÄS § 180 lg 5¹) [2].
4. Arrange the timely and full payment of taxes from the company's assets (MKS § 8 lg 1) [13].
5. If you receive a liability decision, check whether collection from the company was started and three months passed, or bankruptcy was declared (MKS § 96 lg 5) [16], and note the payment deadline (MKS § 96 lg 3) [16].
6. If you are a creditor and cannot satisfy your claim from the company's assets, you may demand that the board member compensate the damage to the company; in bankruptcy, the trustee does this (ÄS § 187 lg 4) [1].

Frequently asked questions

Do the same rules apply to a board member of a public limited company?

Yes, the duty of diligence, joint and several liability, the five-year limitation period and the creditor's right to claim are laid down in the same way for a board member of an AS (ÄS § 315 lg 1–5) [4].

Can the articles of association shorten the limitation period?

The articles of association or an agreement with the board member may provide for another limitation period (ÄS § 187 lg 3) [1]. A creditor or the trustee in bankruptcy may nevertheless bring the claim even if the limitation period has been shortened (ÄS § 187 lg 5) [1].

Is a new board member liable for the company's earlier tax debt?

According to the Supreme Court, MKS § 40 lg 1 does not allow a tax debt that arose before the new board member's own culpable conduct to be claimed from them, but they are liable for interest that arose because of their own breach of duty (RK 3-20-1213/42) [19].

Is a board member liable if they carried out the shareholders' decision?

As a general rule, a member of the management body is not liable if they acted in accordance with a lawful decision of the general meeting or another competent body (TsÜS § 37 lg 1) [9]. The decision must be lawful.

Does bankruptcy end a creditor's action against a board member?

No. The trustee may take the claimant's place in proceedings already under way; if the trustee does not, the creditor may continue the proceedings (RK 3-2-1-8-17) [8].