Increased Management Board member liability in Latvian limited liability companies
The issue of personal Management Board member liability of Latvian limited liability companies has attracted attention both locally and between non-residents serving as managers in Latvian companies.
On June 7, 2016 Latvia’s Supreme Court amended the existing case law. The Civil Cases Department held an extended hearing of 15 judges and invalidated the previous case law that the amounts calculated by the State Revenue Service such as tax debts, late payment charges and fines unpaid due to corporate insolvency can not be claimed by the insolvent company from its Management Board member.
The above decision states that one of the means to be used for recovery of funds during the insolvency process is to make a claim against the Management Board member. The insolvency administrator making a claim against the Management Board member has to prove, (i) the fact and amount of losses caused to the company (effectively – to the creditors), (ii) relation between the losses and acts of the Management Board member, and (iii) that such losses have diminished chances of satisfaction of creditors’ claims in the insolvency process. The Management Board member can be released from his civil liability if the acts were proven to meet criteria of an honest and careful manager (as defined by the law).
It must be observed that the Management Board is liable for accounting operations and retaining of proper corporate records. In its decision the court stated that violation of regulations about accounting operations shall be qualified as a breach hence giving rise to Management Board members’ liability.
Another important issue that must be reminded is that as of January 1, 2015 the Law “On Taxes and Fees” provides for personal liability of the Management Board members for corporate tax debts. The SRS may initiate a process of claiming a delayed payment from the Management Board member in cases when all of the following criteria are met:
- delayed tax payments exceed 18 500 euros (limit set for 2016);
- the decision on collection of delayed tax payments has been notified to the tax payer;
- it has been established that after arising of delayed tax payments the tax payer has alienated assets to a related party;
- a statement has been drawn on impossibility of tax debt collection;
- the company has not filed the obligatory insolvency application.
Furthermore as of July 1, 2016 the SRS is entitled to apply a security measure – prohibition on changing of Management Board members, corporate reorganisation, liquidation, etc. with a view of limiting tax avoidance activities.
Considering changes in the case law and legislative acts the Management Board members shall pay attention and care in selection of their business partners and to the actual business operations so that in the case if tax audit is carried out by the SRS, they would be in a position to provide detailed explanations thus minimising the risks of negative decision by the tax administration.
TRINITI regularly offers its clients proactive advice in relation to the Management Board member liability limitation.