One of the purposes of a limited liability company is that the shareholders or others in the company’s management will not be personally liable for the company’s obligations. If the company is not able to pay a claim, the creditor cannot seek coverage for the claim from the shareholders or board members. However, this does not prevent them from being liable for the loss they have caused the company. In this article, we will take a closer look at liability in a limited liability company.
Liability – legal basis
The Norwegian Companies Act. § 17-1 states that “the company, a shareholder or others may hold the general manager, a member of the board of directors, member of the corporate assembly, investigator or shareholder liable for any damage which they, in the capacity mentioned, have intentionally or negligently caused such party.” This is a legal basis that provides a basis for many different parties to seek compensation from people with key roles in a company. In addition to the company and the shareholders, it is often the creditors who will seek compensation for their loss from someone in the company.
Those who intentionally or negligently contribute to the tortious act as mentioned above may also be held liable in accordance with § 17-1 (2). Here there is no limit to who can be held responsible. It can e.g. be the company’s employees and contract counterparties. Shareholders, board members, and others who are specifically mentioned in § 17-1 (1) will also be relevant for the liability in the Norwegian Companies Act. § 17-1 (2).
Terms of compensation
Section 17-1 of the Norwegian Companies Act states four conditions that must be fulfilled in order for the mentioned persons to be held liable for damages. Financial loss: There must have been a financial loss for the injured party. If e.g. the company must seek compensation from the general manager due to a disposition he has made, the company must have suffered a financial loss. This can be both lost income or increased costs. Basis of liability: The person against whom the claim is directed must have acted intentionally or negligently in his role in the company. This means that the responsibility must be assessed based on the tasks and responsibilities that the law, articles of association, agreement, or other legal basis impose on the individual role in the company. Even if both intentionality and negligence are affected, it is often in practice a question of whether the person in question has acted negligently. Both actual actions and omissions to act are affected. In practice, the assessment of the basis for liability can be divided into two assessments. One must first look at whether the person in question has breached any obligations that follow from the law, articles of association, agreements, or other legal bases, and then assess whether the person in question can be blamed for the breach. If it has been a breach of duty, there will be a presumption of negligence. One must then examine whether individual circumstances make the person in question can nevertheless not be blamed for their conduct. Causality: The act or omission must have a causal link with the financial loss that has occurred. A chairman of the board cannot be held responsible for a reckless conclusion of an agreement if it were another conclusion of an agreement that led to a financial loss. In addition, there is a requirement for the predictability. The financial loss must have been a predictable consequence of the action. Affiliation with the company: To be held liable for damages according to § 17-1 (1), the person in question must have a position that is listed in the section. This also applies to the liability for participation in the Norwegian Companies Act § 17-1 (2). One must contribute to someone who holds the positions mentioned in the first paragraph, committing an injurious act.
Current situations for liability
Liability for damages may be relevant in disputes within the company. One or more shareholders have e.g. abused their position in the company to promote the financial interest of their own or any particular shareholders, at the expense of the company’s interest. This may be the case if some shareholders with a majority at the general meeting get through a change in the articles of association that is in favor of another company in which they have ownership interests, at the expense of the company’s interest. If a company goes bankrupt, it may be relevant for creditors to direct liability to the board of the company. The board has a duty to maintain prudent equity and in the event of bankruptcy, there may be a negligent breach of this duty.
The liability for damages according to the Companies Act § 17-1 is individual. It is the individual board member or the individual shareholder who is obliged. It is not the board or the shareholders as a body. However, there is nothing in the way of directing the same compensation claim against all the board members or several shareholders. Then they are jointly and severally liable for the compensation amount.