Responsibility of the managing director and preventive steps to minimise risks

Author of the article: Mgr. Pavel Čech, ARROWS (office@arws.cz, +420 245 007 740)

The company's CEO holds key decisions that can affect not only the economic stability of the company, but also his personal wealth. If the managing director causes damage to the company by breaching his duties, the company can recover this damage from him.

Obligations of managing directors under the law

According to Section 159(1) of the Civil Code, the managing director must act with the necessary loyalty and with the necessary knowledge and care, all in accordance with the interests of the company. If it turns out that he has made negligent decisions, he may be held liable for the resulting damage.

Typical situations in which a company can recover damages from its director:

• Unfavourable business contracts - the executive signs a contract with unfavourable terms.
• Abuse of power - the executive abuses his position for personal enrichment at the expense of the company.
• Incorrect tax rulings - errors in tax liabilities leading to penalties against the company.

The managing director has a wide range of responsibilities towards the company and its shareholders, which are set out in particular in the Companies Act. The key duties of the managing director include:

• Act in accordance with the best interests of the company - all decisions made by the executive must be for the benefit of the company, not for personal gain.
• Prohibition of competition - the managing director may not, without the consent of the general meeting of the company, conduct business in a similar field to that of the company.
• Transparency and information - regularly inform the shareholders about the financial situation of the company.
• Proper record keeping of accounting and legal documents - inadequate record keeping can lead to liability of the managing director.

Violation of these obligations may result not only in liability for damages, but also in disqualification of the managing director or his personal liability for the company's debts.

Prevention of executive liability

In order to minimise the risk of liability for damages, the managing director should take precautions such as:

• Thorough documentation - every major decision should be properly documented, including supporting documentation, analysis and approval.
• Consultation with experts - regular consultations with lawyers, tax advisors and auditors can help prevent risks.
• Directors and Officers Liability Insurance (D&O insurance) can cover damages caused by wrong decisions.
• Internal control system - having effective internal processes and control mechanisms in place helps prevent errors and fraud.

Conclusion

Managing directors have a fundamental responsibility for the proper management of the company and their decisions can have far-reaching legal and financial consequences. To avoid the risk of personal liability, it is essential to act with the utmost care, in a transparent manner and in accordance with applicable legislation. Compliance with legal obligations, good documentation of decisions and appropriate precautionary steps can help minimise potential risks.

Don't expose yourself to unnecessary risks - keep to your responsibilities and take proactive precautions. If you are unsure of your responsibilities as an executive, consult with the attorneys ARROWS.