Can a director's decision to sell goods at cost turn into a claim against the director himself?

I won a case in which, after 3 years, I finally succeeded in defending my client against complex claims of EUR 200,000 for compensation of damage to creditors in bankruptcy proceedings!

Business decisions are assessed in court cases only after they may have caused losses. But this also means that a CEO's decision to enter into a transaction with particular content is assessed as at the moment he entered into it – what he could understand, know, foresee, etc. These assessments become especially important after bankruptcy proceedings have been opened, when the possibly infringed interests of creditors must be protected.

So, my client, the company's general director, was accused of signing a loss-making contract by deciding to pool production, financial and human resources, as well as professional and business reputation, with another company operating in a common market for the production and sale of certain products.

The dispute in the case was: how should the decision to allow this company to sell the products at barely cost price be assessed? And did the CEO's decision to switch to such a transaction with a single company and to terminate the contracts with previous customers meet the high standards of decision-making expected of a CEO? After all, the other customers had previously paid market prices, whereas now sales were at cost?

The court experts calculated that such a decision had supposedly caused clear damage – because of this transaction my client's company not only made no profit but allegedly also suffered losses of almost EUR 600,000. And if the sales had been at least at market prices, would the loss have decreased by at least 40%?

The claim was dismissed. In the case I succeeded in proving that a CEO's liability cannot be assessed solely on the basis of such “dry” facts, which may sound “good” when presented to the court, but there is always another side to the coin. The general director agreed not only that the sole customer (partner) would buy at cost, but also that it would cover production costs, suppliers' invoices, etc. In total, the company received around EUR 4,600,000 in revenue from this transaction over a fairly short period, and it is hard to say whether, even had the transaction been terminated abruptly (when the first “bad” signs appeared), the situation would not have been even worse. Especially since, as the situation in the market itself deteriorated, my client's customer-partner was no longer able to pay for the goods on time and the debts grew at lightning speed to EUR 400,000.

In cases of this kind, defending CEOs is not easy. These cases are very “slippery” not only legally but also in terms of the “numbers”. It took us 3 years to achieve a result like this one.

Recently I have been defending clients in court – shareholders, directors, board members – against claims of exceptionally large size and complex construction, so I will be sure to share with you insights from the outcomes of these cases. I am pleased to say that my track record in cases of this kind is paying off.

Since I know that many of my followers find this highly relevant – they make decisions in companies every day, fear risk and weigh up all the “pros” and “cons” – I will definitely keep sharing, drawing on practical experience and in plain language rather than dry legalese.

There are about 100,000 companies in Lithuania and at least as many managers. Can you even imagine how many directors end up in court over the decisions they have made? Is this position of a hired director really one that deserves to be called the most attractive? How many of you dream of the general director's – or simply the director's – chair?

LAWYER