When a member of a corporate body fails to act with due managerial care

A Deeper Look at the Duty of Due Managerial Care: More Than Just a Legal Phrase

The concept of the duty of due managerial care is a fundamental principle of commercial law. It is not merely about formal compliance with the letter of the law. It encompasses a wide range of duties and standards of conduct that every responsible executive body should fulfil. Let's look at the key aspects of this duty in more detail:

• Loyalty and the company's interest first: An executive is obliged to prioritise the company's interests over their own, their family's, or the interests of other related parties. Any conflict of interest should be transparently addressed, and ideally, the executive should avoid it. An example of a breach of loyalty could be a situation where an executive concludes a contract with their own firm under terms that are significantly disadvantageous to the company they manage.

• Professional competence and continuous education: An executive is expected to have the necessary knowledge and skills to manage the company. If they lack sufficient expertise in a particular area, they should seek professional advice (legal, economic, technical). Ignoring expert advice that would have prevented damage can be considered a breach of the duty of due managerial care.

• Duty to be informed and due diligence: Before making fundamental decisions, an executive should obtain all relevant information, conduct a thorough risk analysis, and consider various solutions. Insufficiently vetting a business partner before concluding a significant contract, which subsequently causes damage to the company, is a typical example of neglecting this duty.

• Transparency and accountability: An executive should be able to properly justify their actions and decisions and take responsibility for them. Non-transparent decision-making, concealing important information from partners or shareholders, and refusing to accept responsibility for damage caused are contrary to the principles of due managerial care.

• Damage prevention and risk management: The duty of due managerial care also includes an active effort to prevent potential damages. This involves implementing internal control mechanisms, insuring risks, and proactively monitoring developments in the relevant industry. Ignoring obvious risks that executives have been warned about and failing to take adequate measures can lead to liability for the damage caused.

Specific Situations and Examples of Breaching the Duty of Due Managerial Care

To better illustrate when a breach of the duty of due managerial care can occur and what its consequences might be, let's look at a few specific examples from practice:

• Unfavourable contracts: An executive concludes a contract for the company with an overpriced supplier without a proper tender process, causing the company unnecessary costs. Or conversely, sells a key company asset below market price to a related party.

• Neglect of tax obligations: An executive repeatedly fails to meet deadlines for filing tax returns, leading to high fines and late payment interest that the company must pay.

• Risky investments without analysis: An executive invests a significant portion of company funds in a high-risk project without prior expert analysis, and the project fails, causing the company a significant financial loss.

• Competitive conduct: While in office, an executive secretly starts a business in the same field and poaches clients and employees from their current company.

• Inaction in a crisis situation: An executive ignores clear signals of the company's impending financial problems and takes no steps to avert them, thereby deepening the losses and potentially leading to bankruptcy.

• Misuse of company funds: An executive uses the company credit card for private purposes, has fictitious travel expenses reimbursed, or pays themselves unauthorised bonuses.

In each of these cases, it is crucial to prove a causal link between the executive's breach of duty and the damage incurred. This means that the damage would most likely not have occurred without the executive's unlawful conduct.

The Process of Claiming Damages: A Step-by-Step Guide to Your Rights

If you believe that the actions of your company's executive body have caused damage as a result of a breach of the duty of due managerial care, it is important to proceed systematically and with professional legal support. Here is a more detailed breakdown of the steps you should consider:

1. Internal investigation and evidence gathering: The first phase involves conducting an internal investigation and gathering all available documents and information that indicate a breach of the executive's duties and the occurrence of damage. This includes contracts, invoices, internal directives, email communication, minutes from general meetings, accounting records, and other relevant materials.

2. Expert legal assessment: A key step is to consult with a law firm specialising in commercial law and the liability of statutory bodies. Experienced lawyers will conduct a thorough analysis of the collected evidence, assess the legal situation, and evaluate your chances of successfully claiming damages. They will advise you on the next steps and alert you to potential risks.

3. Letter before action for damages: If the legal analysis confirms the existence of a claim for damages, a written letter is usually sent to the statutory body (executive). This letter should clearly specify the damage incurred, describe the unlawful conduct, and set a deadline for the voluntary payment of the requested amount. A well-drafted letter before action can, in some cases, lead to an out-of-court settlement.

4. Preparation and filing of a lawsuit: If there is no satisfactory response to the letter before action from the statutory body, the next step is to prepare and file a lawsuit with the competent court. The statement of claim must contain a precise description of the factual circumstances, the legal classification of the unlawful conduct, the amount of damages claimed, and relevant evidence.

5. Court proceedings: Court proceedings can be lengthy and demanding. They involve the exchange of written submissions, the taking of evidence (e.g., witness examinations, expert opinions), and final hearings. Quality legal representation is absolutely essential at this stage to successfully enforce your rights.

6. Debt recovery: If the court rules in your favour and awards you a claim for damages, it is necessary to proceed with the actual recovery of the debt. This may involve enforcement proceedings if the debtor does not pay voluntarily.

Prevention is Key: How to Minimise the Risk of Breaching the Duty of Due Managerial Care

The best way to avoid complex and costly court disputes over damages is active prevention. Here are some recommendations on how to minimise the risk of a breach of the duty of due managerial care in your company:

• Clear definition of powers and responsibilities: Create clear internal guidelines and an organisational structure that define the powers and responsibilities of individual members of the executive body and other senior managers.

• Introduction of control mechanisms: Implement effective internal control systems to ensure transparency in decision-making and the management of company funds. Regular audits can identify potential problems early on.

• Careful selection of executive bodies: When selecting executives and board members, pay attention to their professional competence, experience, and reputation. Check their references and previous work.

• Regular education and information: Ensure that executive bodies are regularly informed about current legislation and standards of due managerial care. Offer them relevant training and seminars.

• Transparent communication: Promote open and transparent communication between the executive body, partners/shareholders, and other stakeholders. Timely information about important decisions and risks can prevent misunderstandings and disputes.

• Liability insurance: Consider taking out liability insurance for executive bodies (D&O insurance), which can cover legal defence costs and any damages in the event of a proven breach of duty.

• External legal advice: Regularly consult with a lawyer specialising in commercial law to ensure that your procedures are in line with current legislation and the standards of due managerial care.

In Conclusion: Don't Ignore the Risks, Defend Your Rights

A breach of the duty of due managerial care by an executive body can have serious financial and reputational consequences for your company. Do not ignore the warning signs, and if you suspect unlawful conduct, do not hesitate to act. Thorough documentation, expert legal analysis, and timely action are key to successfully claiming damages. And remember, active prevention is always better than dealing with problems after they arise.

Do you suspect that your company's executive body is acting in breach of the duty of due managerial care? Contact our Prague-based law firm for a no-obligation consultation. We will provide you with expert advice and help you protect your business.