Liabilities of Directors in Private Limited and Public Liability Companies

Corporate Clients, Corporate and M&A

Directors in private limited companies (abbreviated in Bulgarian as ‘OOD’) and public liability companies (abbreviated in Bulgarian as ‘AD’) have a gamut of responsibilities and attendant liabilities. We review below three kinds of liability in Bulgarian law: civil liability; administrative liability and criminal liability.

Disciplinary liability – a creation of labour law – is left aside for the purposes of this note. Conceivably, a director may be liable as an employee of a company, but this does not arise from his director’s service agreement, but requires the director to be performing an additional role at the company, for which he or she may then be disciplinarily liable.

Civil liability

Liability to the company

At a general level, civil liability in Bulgarian law is based on the duty to repair loss caused to another where the loss arises through fault (including negligence), including non-compliance with statutory duties. Therefore the directors of both OODs and ADs are liable for such losses as they unlawfully cause to the company of which they are officers. Such liability requires negligence or fault, whether through action or omission.

In companies with multiple directors, each director is jointly and severally liable for loss. However, each director may seek to individually avoid his or her liability on the basis of lack of fault, among other things. Thus, for example, directors are not liable for decisions taken by their predecessors.

For a company to bring a claim against a director, its members must resolve in general meeting in favour of a claim. The director may be liable (subject to a court order):

(i) to compensate the losses; (ii) pay interest and (iii) in certain cases to pay additional penal damages which may follow from the director’s service agreement.

Conversely, the company may resolve in general meeting to waive any liability of the director and such a resolution, once validly passed, is irrevocably binding on the company.

Liability to shareholders and to third parties

The director may also be liable to the shareholders and to third parties (e.g. to the company’s creditors for false formal statements made upon a capital reduction).

Unlike an OOD, the directors in an AD are legally required to provide the company with a guarantee in an amount not less than the equivalent of a quarter of their annual remuneration. This guarantee may be provided in various ways, including by depositing cash directly with the AD or in its bank account; issuing a bank guarantee in favour of the AD; or by conditionally pledging securities in favour of the company, etc. The guarantee is released on termination of the director’s appointment.

Example breaches of statutory duty

Below are examples of statutory duties giving rise to civil liability to creditors or third parties. These are non-exhaustive, and in any event are additional to the more general class of duties which directors owe not to harm the company or certain third parties, described above.

In the Commerce Act 1991:

• Where a going concern is being acquired by a company, the acquirer’s directors are liable to the target’s creditors to ensure that the newly-acquired assets are managed separately from those of the acquirer for 6 months from acquisition;
• The director of an OOD, unlike the director of an AD, is liable to ensure the due and proper book keeping of the OOD;
• On incorporation, the directors of an AD must certify before the AD’s bankers that the AD has applied to register with the Company Registry. Failure to certify allows subscribers of shares to claim their capital back (including from the directors personally);
• Directors are liable to the AD for transactions in breach of the company’s articles of association;
• The directors of an AD are also liable when contracting with a connected person without prior board consent;
• Directors are liable to the shareholders for the losses resulting from failure to perform statutory duties during the preparation and execution of a corporate reorganisation (such as merger, demerger, etc.);
• A director who fails to apply to court to open insolvency proceedings within 30 days of the company’s insolvency, is liable to the company’s creditors.

In the Tax and Social Security Procedure Code 2005:

• Where a director withholds information which he or she is obligated to disclose to the tax authority or to a bailiff and as a result, corporate tax liabilities fail to be collected, the director is liable up to the amount of unpaid tax.

The withholding could conceivably take place occasion when:

1. the director declares (personally or, arguably, through an agent such as the company’s accountants) information to the tax authorities, for example in a tax return or a payroll return;
2. during a tax audit;
3. when the director withholds information from a bailiff in the course of enforcement proceedings, e.g. by failing to declare assets of the company.

• A director may be liable for corporate tax liabilities when he or she, in bad faith, performs one of the following, as a result of which the assets of the company decrease and as a result of such decrease the corresponding payments for taxes and mandatory social insurance contributions fail to be collected:

acts which constitute hidden distributions of profits or dividends or transfers of assets or of the going concern, either for no value at all or for a value which is materially lower than the market price of the assets; or causes an encumbrance to be created over the company’s assets, etc. as a security for another person’s debt, and the encumbered assets are subsequently disposed.

In such cases, the director is liable up to the value of assets disposed of.

The range of possible situations of bad faith appears wide. For instance, where:

the relevant act of bad faith is performed within one year of the tax obligation arising or being declared (whichever is later); and when the relevant act is performed in the period from the commencement of a tax audit pursuant to the Code and up to 6 months from its end or, in the case of a tax inspection, within 6 months of the formal initiation of the inspection.

The liability of the director in both situations above is subsidiary to that of the company: he or she would be required to pay the tax due insofar as it cannot be collected from the company.

In the Credit Institutions Act 2006:

• a bank director (banks are always ADs) who extends a loan without the necessary board resolution is liable jointly with the borrower for the loan amount sum.

In the Public Offering of Securities Act 1999:

• a director is liable for the provision of false information in the company’s financial statements and other documents destined for publication.

Administrative liability

The administrative liability of directors arises under administrative law, i.e. law providing a public body with powers in certain area of public life. Such breaches typically result in fines and sometimes in other consequences.

Some examples are:

In the Protection of Competition Act 2008:

• breaches of the Act by a director, such as failure to notify the Commission for Protection of Competition of a relevant merger, can result in fines of up to BGN 50,000 (EUR ~25,500);

In the Public Offering of Securities Act 1999:

• breaches of the Act by a director, such as failure to notify the Financial Supervision Commission of changes in the company’s articles of association can result in fines of up to BGN 100,000 (EUR ~51,000);

In the Corporate Income Tax Act 2006:

• a director who fails to file a tax return on behalf of the company can be fined up to BGN 1,000 (EUR ~510).

Criminal liability

Criminal liability arises when an individual commits a crime with the requisite state of mind. This liability is always personal and is typically triggered by intentional action or inaction, but sometimes, when expressly provided by the Criminal Code 1968, also by negligent action or inaction. All criminal offences and their respective punishments are exhaustively laid down in the Criminal Code 1968. The act complained of must be criminalised at the material time.

A director may commit a crime in the context of carrying out his or her duties in a range of cases.

For example:

• Tax evasion of amounts over BGN 3,000 (EUR ~1,530) is punishable by imprisonment of 1 to 6 years and a BGN 2,000 (EUR ~1,000) fine;
• Tax evasion of amounts over BGN 12,000 (EUR ~6,100) is punishable by imprisonment of 3 to 8 years and confiscation of part or the whole of the director’s property;
• Failure to apply for insolvency within 30 days of cessation of debt repayments by a company is punishable by imprisonment of up to 3 years or a fine of BGN 5,000 (EUR ~2,550).