A fatal accident at work, a large shipment not reaching its destination because of an unreliable carrier, an high amount invoice going unpaid because of a customer’s bankruptcy, a devastating flood or fire, damages to the environment.
These are just some of the risks that, if not properly anticipated and mitigated with appropriate prevention measures, could expose company directors to large claims for compensation and damages, often to be paid out of their own personal assets.
In the unfortunate event of a breach of health and safety local law or of the articles of association, in case of legal dispute, directors can protect themselves by taking out specific insurance cover.
However, before taking out this insurance, it is essential to identify, reduce and control those risks that could lead to a claim.
It is therefore equally strategic to put down a risk reduction plan with risk managers and insurance consultans with long professional background before a large claim comes knocking on the manager’s door.
The legal obligation to protect the budget and the business continuity from devastating events capable of undermining the survival of the company also applies to directors of companies in several European countries.
If we do not want to pay claims, fines and penalties, it is necessary to know very well the local and international law, in order to safeguard company assets, the environment, the interests of third parties, workers and suppliers.
In this article, we try to outline, at general level, from the perspective of claim happened, the most important risks faced by company directors in major Eastern European countries.
Visegrad area: Hungary, Slovakia, Czech Republic, Poland.
Hungary
In Hungary, directors may face the risk paying damages following negligent conduct in the course of their management duties, having unlimited liability towards their company for damages caused by the breach of their duties.
In addition, it is the company who will be liable towards third parties for the actions of their directors (i.e. such third parties can sue the company, not the individual directors).
However, if the director causes damages deliberately to third parties, the director will be liable jointly with the company in fronto of the third party.
Directors are liable to shareholders, third parties and company creditors.
In the first case, directors have direct liability to the company for violations of local law and internal rules governing the proper functioning of the company.
Let’s think of significant environmental damage caused by the spillage of liquids from the production hall: in this specific case, compensation for the costs of cleaning up the polluted areas can be claimed from the management that failed to take appropriate measures to prevent the pollution of the natural habitat surrounding the production site.
Local law, protecting the interests of directors, provides for the absence of liability when they prove, as was the case in Hungary, that the damage occurred beyond their control and functions regulated in their employment contract.
In the second case, directors may also be liable to third parties.
To be clear, if it is a third party, other than the shareholders, who claims damages, the risk of paying out of their own pocket lies with the guilty directors.
Let us take a practical case: an employee is fatally injured during working hours: if the local health and safety law is found to have been blatantly violated, the director risks paying a life annuity to the heirs of the deceased employee in the company.
Finally, the managers are risking to pay upfront with their assets damages at personal level, when he violates creditors’ rights if the company is found to be insolvent.
With specific regard to company crises, in all the countries of the Visegrad area, as we will see below, this very important rule applies.
In the event of a sudden and devastating event capable of jeopardising the company’s balance sheet (in addition to the case of serious environmental pollution just seen, think of a major production stoppage due to fire), the manager must immediately inform the shareholders and take all appropriate measures to limit the outbreak of the crisis and the possible insolvency of the company.
Slovakia
Also in Slovakia, as in Hungary, directors may be called before the local court to defend themselves against request of compensations claims for damages to the company, third parties, creditors.
Repetita iuvant: directors who breach their obligations while exercising their powers are obliged to jointly and severally compensate the company for the damage caused, except when they can prove that they exercised their powers with professional care and in good faith and that they were acting in the company’s interest.
In Slovakia, proving that they acted without malice and on the instructions of the board of directors is not enough: gross negligence alone is sufficient to expose the manager to personal liability.
Any private agreement to the contrary is void by law. Liability is criminal when the interests of creditors are damaged.
If a devastating event puts the balance sheet in crisis (a supplier does not pay for an important order, a major fire stops production for weeks, the family of an employee who has died in the company sues us because they hold the company responsible for thefatal accident at work) the manager must take immediate action to secure the interests of the company and the creditors.
In the event of insolvency, if the insolvency administrator’s instructions are not followed, the managers risk paying hefty fines in addition to the penalty.
Czech Republic
The risks we have seen above for Hungary and Slovakia also apply to company directors in the Czech Republic, being every shareholder legally entitled to claim, on behalf of the company, compensation or damage against a director and his staff.
Let’s take few exemples:
- a worker dies in the company.
- a large flood or flash flood damages the factory facilities forcing weeks of production stoppage.
- our resort hotel burns down and some guests lose their lives.
Well, these are devastating events that, if not adequately predicted and mitigated, can make management personally liable for failure to reduce and control risks in the company’s business.
The great floods that literally devastated the country in 2002 and 2013 are natural disasters that are beyond the scope of normal forecasting and control.
However, precisely because the Czech Republic is a country highly susceptible to these risks, we suggest periodically conducting hydrogeological analyses of the territory where our business is located.
In most cases, it is not sufficient to check the condition of roads near the production site by placing temporary barriers.
Therefore, managers can prove that they have taken steps to reduce the risks of natural disasters by proving that they have taken basic preventive measures against flooding, such as:
- construction of protective fences around valuable equipment and machinery
- ground reinforcement of tanks, silos and liquids containing flammable, toxic, polluting substances
- moving electrical machinery, computer systems and power distribution systems above the walkable floor of the hall (normally at least 12 cm above the ground)
- installation of flood power and gas blocking and interruption systems
- defensive safety barriers designed specifically for the production site.
In the Czech Republic, creating unfair competition between the company you work for and another company, or simultaneously occupying the position of director of another company similar in terms of production activity and services performed, may expose the company director to damages compensation.
In the event that an obvious connection of illegitimate and competing activity is proven, the director risks paying damages, both to the business partners and to third parties.
A similar risk exists when the director fails to warn the shareholders and creditors in good time of a possible state of crisis that could jeopardise the continuity of the business.
The Czech Civil Code punishes this behaviour very seriously, preventing the responsible director from occupying similar positions in other companies.
Poland
Finding out that one of our workers has lost his life because we did not pay attention to health and safety in the company must be a horrible experience, especially if we have to appear before a judge.
Poland is no exception to this rule: in this country, directors’ liability for damages to the company, shareholders and creditors is personal and unlimited.
Under Polish law, shareholders, or third parties, must prove:
1.that they have suffered damage
2.that the damage was caused by a specific violation of the law.
Let’s take another practical case, based on a major accident in Poland that caused quite a stir: the death of 65 people who were literally buried by snow that had broken through the roof of a sports hall.
With specific reference to production facilities, if the administrator is found not to have complied with the local safety law, he can be held liable for damages.
In addition to the administrator, all those directors/technicians who, although not in management positions, were aware of the dangerous state of the building are liable.
With regard to company crises, the general rule also applies in Poland that managers are exempt from liability when they prove that the creditor has not suffered any damage from the failure to initiate a state of crisis within the time limit prescribed by law.
If the company enters into crisis, managers must absolutely avoid any malicious behaviour that could prejudice creditors by transferring the company’s assets and funds within a new company set up for this purpose, or when they prefer some creditors to the detriment of others.
Balkans: Romania, Croatia, Serbia.
At very general level in these Countries if the directors were acting without proper corporate authority, or if the directors exceeded the powers conferred to them by the law, third parties would be entitled to claim damages from the directors as if they acted in their own name.
The high frequency of seismic events and large floods are the reason why we have decided to deal with these countries together by immediately considering the high risk they share.
A major earthquake may, in a very short space of time, jeopardise not only production but also the safety of workers.
On the one hand, we cannot ask a manager to predict if and when an earthquake might hit the area where the company is located.
On the other hand, we can reduce the risk of human casualties by training workers and all workers to deal with critical emergency situations of this kind through training courses and in-company evacuation simulations.
The calculation of seismic vulnerability parameters (seismic action of the reference territory, peculiar characteristics of the buildings, destination/class of use of the artefacts) can avert the company from reducing the financial consequences of unpredictable and devastating events.
Adopting these prevention and control measures is very important: the rule that we have seen above for the other Visegrad countries applies in both Romania and Croatia.
In the event of a violation of local law, the administrator must defend himself in court against possible claims by the company, third parties, and creditors.
Similar cases occur, when a sudden and devastating event, such as a seismic event, suddenly impacts company budgets to such an extent that business continuity is jeopardised.
Other events with dire consequences that, if not foreseen and mitigated, can put a company’s balance sheet in crisis are:
–a production stoppage
-the death of an employee at work
-a liquidity crisis resulting from the non-payment of an important order
-physical damage to consumers from defective products
-a request for liquidation of shares by the heirs of a deceased shareholder.
Since Serbia is a country at high risk of flooding, if our factory is located near a watercourse or within an area already affected by natural disasters of this type, we recommend that you carefully check whether flood prevention measures exist.
If, due to a major flood, the factory were to go under water, along with goods and machinery, we are sure that in addition to direct damage to the hall, there would be financial damage from production stoppage.
Prolonged production stoppage is one of those events capable of causing business insolvency: the failure to provide active means of protection against the risk of flooding can be blamed on the manager who is guilty of not having done adequate prevention.
In Serbia, insurance policies are required and for some commercial and industrial activities they are compulsory. For this reason, we suggest that managers check carefully whether the business falls within the mandatory cases of the law.
Final thoughts: risk management and assistance to prevent major risks and expensive claim. The new ESG obligations.
In this article, we have identified, in broad terms, the serious financial consequences that directors risk in case of negligent violation of local and international law when managing a company based in the major countries of the Visegrad area.
Every company is different, which is why it is absolutely essential to critically analyse in detail:
- the local legislation on the personal liability of directors
- the manufacturing site and the areas surrounding the factory
- the production cycle
- the product destination markets
- the commercial supply relations with the main suppliers, both local and foreign.
The risk of flood surrounding the manufacturing site of a company operating in Poland may be very low, but, if your company is in Czech Republic, the threat of devastating damages may be very high.
The high risks of occupational accidents that frequently occur at timber companies in Serbia and Croatia are quite different from those of agricultural enterprises in the Czech Republic: a worker can lose his life on board his tractor or due to the malfunction of a wood-processing press.
The law on health and safety at work and directors’ liability is different in each country: if we are not informed about law changes we are exposed to fines, penalties and compensation.
The risks of recall risk of a food dealer based in Hungary and serving several markets is quite different then the risk of a food producer located in Italy and exporting wordwide.
Precisely because the risks are many and varied, relying on consultants to manage the threats to our business abroad is absolutely essential.
In very brief, they offer these strategical services to those managers who understand that it is much better going seeking to reduce risks before buying insurance protection as follows:
- technical survey of production site(s)
- list of the devastating events that can jeopardise your investments and assets
- selection of which measures should be taken to reduce, prevent and control the economic consequences of a major production stoppage
- risk transfer of major hazards to insurance companies, at international or local level
- claim handling.
As of 1 January 2024, European companies complying under the Corporate Sustainability Reporting Directive (CSRD) are required to report and disclose all necessary informations on how their operations affect the environment and how they manage risks.
In addition of that, Environmental, Social and Governance (ESG) factors have emerged as key pillars that influence a company’s reputation, resilience, and long-term success.
Pollution, deforestation, labour rights violations, unsafe working conditions or bribery and corruption: managers, in case of legale dispute, must count on professional lawers able to protect their interest before the judge in case of negligent (and not wilful) conduct.
The legal expenses can be paid directly by the manager liability coverage.
But again, organisation and businesses, must be very carefull in identifing these risks before they happen, if they want to maintain their integrity and credibility.
