Liability of statutory body (managing directors, board members etc.) for Debts and for Damages vis-á-vis Company creditors

Director Liability of the Statutory Body (Managing Director, Board Member, etc.): Due Managerial Care, Liability for Company Debts and Duties in Insolvency

The office of a managing director is not a formality. Anyone who accepts it undertakes to meet the standard of care set by law. A breach may oblige the director to compensate the company for damage and to surrender any benefit obtained. Under certain conditions, the director also pays the company's debts to its creditors from personal assets. Director liability is therefore a serious matter for every managing director and board member. In our previous article we discussed when the statutory body must file an insolvency petition. This article describes the general framework of director liability. It draws on Section 159 of Act No. 89/2012 Coll., the Civil Code (the “Civil Code”), and Act No. 90/2012 Coll., on Business Corporations (the “BCA”). Finally, the article covers the special duties that apply to directors when the company becomes insolvent.

Due Managerial Care as the Basic Duty

The starting point is Section 159 (1) of the Civil Code, under which: “whoever accepts the office of a member of an elected body undertakes to perform it with the necessary loyalty and with the required knowledge and diligence”. Due managerial care therefore has two components. The first is the duty of loyalty, that is, to give priority to the company's interests over one's own interests or those of third parties when performing the office. The second is the duty of due care, which means acting with the required knowledge and diligence.
The Supreme Court has long stressed that this is a duty to follow the correct procedure, not a duty to achieve a result. In its judgment of 30 September 2019, Case No. 27 Cdo 90/2019, the court summarised its settled case law as follows: “[t]he managing director of a limited liability company is responsible for proper performance of the office (in line with the requirement of due managerial care), not for the result of his activities”. The risk of business failure is borne by the company and, indirectly, by its shareholders. A managing director cannot be penalised because a plan did not succeed, provided it was carried out with due managerial care.
A member of the body performs the office in person (Section 159 (2) of the Civil Code). He may authorise another member of the same body only to vote for him in an individual case when he is absent. He therefore cannot shift his responsibility to a shareholder, manager or adviser.

The Business Judgment Rule

The BCA specifies the general standard of care through what is known as the business judgment rule. Under Section 51 (1) BCA, “[a] person acts with diligence and with the required knowledge if, in making a business decision, he could reasonably assume in good faith that he was acting on an informed basis and in the defensible interest of the business corporation; this does not apply where the decision was not made with the necessary loyalty”.
The court therefore does not examine whether the decision looks correct today, but whether the decision making process was correct. The cited judgment, Case No. 27 Cdo 90/2019, shows that the director must use “reasonably available sources of information (both factual and legal)” and weigh the advantages and disadvantages of the options on that basis. This assessment is made ex ante, that is, according to what the director knew or should have known when deciding. The court must avoid what the case law calls “retrospective prophecy” or the “general after the battle” approach. However, the business judgment rule does not protect a director who acted in a conflict of interest or otherwise disloyally.
The yardstick is an objective standard. Under Section 52 (1) BCA, account is always taken of the care that another reasonably diligent person would have exercised in a similar situation as a member of a similar body. In its judgment of 30 June 2022, Case No. 27 Cdo 59/2022, the Supreme Court held that foreseeability of damage also turns on “whether an imaginary “reasonably diligent” administrator (manager) could have recognised the risk of damage”. The personal knowledge and experience of the particular director are therefore irrelevant. In the same case, the court stated that a director who files a lawsuit on behalf of the company “must proceed on the basis that, if the company loses the case, it may become obliged to compensate the opposing party's costs”.
Under Section 51 (2) BCA, a director may ask the general meeting for an instruction on the management of the business. The law expressly adds that this does not affect the director's duty to act with due managerial care. An instruction from the general meeting can therefore be a useful basis, but it does not automatically exonerate the director.

Expert Assistance and Delegation

A managing director does not have to be an expert in everything within his remit. He must, however, recognise when he needs expert help. According to the judgment in Case No. 27 Cdo 90/2019, “if he lacks the necessary expert knowledge to handle matters falling within the performance of his office, he is obliged to have them assessed by a person who has that knowledge; the ability to recognise which activities he can no longer perform, or which necessary knowledge and skills he lacks, is part of due managerial care”.
Merely engaging an adviser is not enough, however. The director is responsible for properly selecting the third party, for giving clear instructions and providing cooperation, and for adequately supervising the delegated activity. In the case at hand, the managing director selected a supplier of IT services in cooperation with an acquaintance who dealt with the field as part of his employment. The Supreme Court set aside the lower courts' decisions because they had not examined the criteria by which the consultant was chosen, how he demonstrated his expertise and whether the managing director supervised his work.

Presumption of Negligence and “Straw Men”

The second sentence of Section 159 (1) of the Civil Code provides: “[a]nyone who is not capable of such due managerial care, although he had to find this out when accepting the office or while performing it, and who does not draw consequences for himself from it, is presumed to act negligently”. Anyone who knows he is not up to the office, or finds this out while performing it, must draw consequences from it. Typically, he should arrange the necessary help or resign. Neither ignorance nor lack of time exonerates him.
The Supreme Court confirmed this approach for persons who hold the office only formally. In its judgment of 25 March 2025, Case No. 27 Cdo 2293/2024, it stated that “[e]very legally competent person with the reason of an average person must realise that performing the office of managing director of a limited liability company as a “straw man” (Czech: “bílý kůň”) is a breach of the managing director's duties”. In that case, the lower courts had dismissed the creditor's action, citing the managing director's difficult personal and family situation. The Supreme Court set aside their decisions. It concluded that where someone intentionally breaches a duty and thereby gives rise to a claim of another person who did not contribute to it in any way, granting that claim does not as a rule lead to cruelty or ruthlessness offending ordinary human feeling.

Loyalty and Conflict of Interest of a Statutory Body Member

The duty of loyalty is specified in Section 54 et seq. BCA. A managing director who learns that his interest may conflict with the interest of the company must inform the company without undue delay. If he intends to conclude a contract with the company, he must, under Section 55 (1) BCA, give notice of this and state the conditions on which the contract is to be concluded. The same applies to contracts with persons close to him or persons influenced or controlled by him.
This is no formality. In its judgment of 10 January 2023, Case No. 27 Cdo 1206/2022, the managing director agreed a loan with the company and later paid himself the principal and interest from the company's account. The Supreme Court concluded that “by failing to comply with the information duty under Section 55 (1) of the Business Corporations Act, the defendant breached the duty of necessary loyalty, which forms part of due managerial care”. It added that the company need not be bound by such a contract at all. It criticised the lower courts for assessing the claim only as compensation for damage. They did not consider whether the company is entitled to the surrender of the benefit.

Consequences of Breaching Due Managerial Care Towards the Company

A breach of due managerial care primarily gives rise to a duty to compensate the company for damage. The prerequisites are a breach of duty, the occurrence of damage and a causal link between them.
The BCA adds three special rules on director liability. Under Section 52 (2) BCA, in court proceedings the member of the body himself bears the burden of proof as to whether he acted with due managerial care, unless the court decides that this cannot fairly be required of him. A director should therefore keep the documents underlying his decisions, namely analyses, offers, advisers' opinions and minutes of meetings. Further, under Section 53 (1) BCA, a person who breached the duty of due managerial care must surrender to the company the benefit obtained in connection with such conduct. If this is not possible, he must compensate it in money. This claim does not depend on whether the company suffered damage. Finally, under Section 53 (2) BCA, legal acts of the company that limit the liability of a member of its elected body are disregarded. A contractual limitation or exclusion of the director's liability in the contract on performance of office therefore has no effect.
Conversely, the law allows damage caused by a breach of due managerial care to be settled by an agreement with the director. Under Section 53 (3) BCA, however, such an agreement requires for its effectiveness the consent of the general meeting, adopted by at least a two thirds majority of the votes of all shareholders.
A breach of duties may also affect remuneration. Under Section 61 (2) BCA, performance under the contract on performance of office is not provided if the performance of the office evidently contributed to the company's adverse economic result, unless the person who approved the contract decides otherwise.

Director Liability for Company Debts under Section 159 (3) of the Civil Code

For creditors, the most important provision is Section 159 (3) of the Civil Code: “If a member of an elected body has not compensated the legal entity for damage caused by a breach of duty in the performance of office, although he was obliged to compensate it, he is liable as a guarantor to the creditor of the legal entity for its debt to the extent to which he has not compensated the damage, if the creditor cannot obtain performance from the legal entity.”

Conditions of Statutory Guarantee Liability

The liability therefore arises directly by operation of law and does not require a constitutive court decision. Three conditions must be met at the same time. The director must cause the company damage by breaching a duty in the performance of office. He has not compensated the company for this damage. And the creditor cannot obtain performance from the company. The scope of liability is limited to the amount of uncompensated damage. Once the director compensates the company, the liability ceases to that extent.
In the cited judgment, Case No. 27 Cdo 59/2022, the Supreme Court explained that the purpose of the provision is to give creditors a “tool” for situations where the recoverability of their claims against the company is impaired and the director has caused the company damage that he has not compensated. The Supreme Court further held that the liability does not arise only when the company's claim for damages falls due. For the liability to arise, “it is sufficient that he is entitled to perform his duty to compensate the damage”. The company therefore need not first call on the director to compensate the damage.

What Counts as Damage to the Company

In practice, it is important what is considered damage to the company. Under case law on the earlier regime, which the Supreme Court in the same judgment expressly extended to the regime effective from 1 January 2014, “[t]he damage sustained by a company is not, without more, every one of its unpaid (due) debts, but it may consist of claims arising from the company's default in performing a debt, for example the costs of court proceedings or the duty to pay default interest or a contractual penalty”. A creditor targeting the director must therefore allege and prove specific damage to the company caused by a breach of duty. An unpaid invoice alone is not enough.

Inability to Recover from the Company, Limitation and Jurisdiction

On the condition that the creditor cannot obtain performance from the company, the Supreme Court stated in its judgment of 27 March 2025, Case No. 27 Cdo 2540/2024: “for statutory liability under Section 159 (3) of the Civil Code to arise, it is not necessary for the creditor to have asserted his claim against the company by action or to have filed it in insolvency proceedings; in proceedings against the member of the elected body he need only prove that he cannot obtain satisfaction of his claim from the company's assets, which will as a rule be met already where the company's insolvency has been established”.
The same judgment contains an important defence for the director. In liability proceedings, he may object that the company's right to compensation for damage is time barred. This right is subject to a subjective three year limitation period and an objective ten year period, or fifteen years where the damage was caused intentionally (Section 636 of the Civil Code). If the company's right was time barred on the day the creditor filed the action, the action cannot be upheld to that extent. Filing the creditor's action, however, “stops” the running of the limitation period for the purposes of these proceedings. A later limitation of the company's right therefore does not help the director.
From the procedural perspective, regional courts have subject matter jurisdiction in the first instance over proceedings on statutory liability for breach of due managerial care (Section 9 (2) (p) of the Civil Procedure Code). If the director resides in another EU member state, the creditor may, according to the Supreme Court's resolution of 22 August 2024, Case No. 27 Cdo 3032/2023, also sue him at the court of the place with which the company's activities and the related financial situation are connected.

Director Liability of a De Facto Managing Director

A person cannot avoid liability by managing a company without a formal appointment. Under Section 62 (1) BCA, a person who in fact holds the position of a member of an elected body, although he is not one, is subject, among other things, to the provisions on the duty to act with due managerial care and on the consequences of its breach. It does not matter what relationship he has with the company. Likewise, Section 69 (2) BCA extends the insolvency sanctions under Sections 63 to 66 BCA to former members of the statutory body and to de facto managers.

Special Duties of a Statutory Body Member in the Company's Insolvency

If the company becomes insolvent, further duties add to the general liability. The first is the duty to file an insolvency petition under Section 98 of the Insolvency Act and liability to creditors for damage if it is breached under Section 99 of the Insolvency Act. We discussed this in detail in the previous article: Company Insolvency and the Managing Director's Duty to File an Insolvency Petition.
The second are special duties under Section 66 BCA. Their common prerequisite is that the member of the statutory body contributed, by breaching his duties, to the company's insolvency and that the insolvency court has already decided on the method of resolving the insolvency. On the insolvency administrator's petition, the insolvency court then decides on two claims.

Surrender of Benefits

The first is the surrender of benefits. Under Section 66 (1) (a) BCA, the director must surrender to the insolvency estate the benefit from the contract on performance of office and any other benefit from the company, going back up to two years before the commencement of the insolvency proceedings. This duty applies only to insolvency proceedings commenced on a petition of a person other than the debtor. Timely filing of his own insolvency petition therefore protects the director from this sanction.

Action to Make Up the Shortfall in the Insolvency Estate

The second is the action to make up the shortfall in the insolvency estate (in Czech, doplnění pasiv). Where bankruptcy has been declared on the company's assets, the insolvency court may under Section 66 (1) (b) BCA decide that the director must provide to the insolvency estate performance “up to the amount of the difference between the total of the debts and the value of the assets of the business corporation”. In determining the amount, the court takes into account in particular the extent to which the breach of duty contributed to the insufficient size of the insolvency estate. The institution was taken from French law and replaced the earlier liability under Section 68 BCA on 1 January 2021. Unlike that liability, the performance does not serve individual creditors but falls into the insolvency estate for the benefit of all creditors.
The proceedings are an incidental dispute (Section 66 (3) BCA). The petition is filed by the insolvency administrator, even where the creditors' committee decides on it. If the estate lacks funds for the costs of the proceedings, the administrator may make filing the petition conditional on an advance from creditors (Section 66 (2) BCA).
It was long disputed whether Section 66 BCA can also be applied to conduct that took place before 1 January 2021. In many cases, insolvency and appellate courts rejected this, citing the prohibition of genuine retroactivity. The Supreme Court resolved the question in its judgment of 22 July 2026, Case No. 27 ICdo 6/2025. It concluded that “the application of Section 66 (1)(b) of the Business Corporations Act to conduct of members of the statutory body of a business corporation carried out between 1 January 2014 and 31 December 2020 in insolvency proceedings commenced after 31 December 2020 is a manifestation of generally permissible quasi retroactivity and does not violate the principle of protecting the confidence of addressees of legal regulation in the stability of the legal order”. For insolvency proceedings commenced after 31 December 2020, the new regime therefore also applies to earlier conduct of directors. What matters is the date the insolvency proceedings commenced, not the time when the director breached his duties.

Disqualification from Office

Disqualification from office is linked to the action to make up the shortfall. If a duty under Section 66 (1) BCA was imposed on the director, the court decides under Section 63 (2) BCA on his disqualification even without a petition. The disqualified person may not hold the office of a member of the statutory body of any business corporation for up to three years. Independently of insolvency, under Section 63 (1) BCA the court may also disqualify a member of the statutory body who repeatedly or seriously breached his duties in the last three years before the commencement of the proceedings. Anyone who violates the ban is liable under Section 65 BCA for the performance of all the company's duties arising during the time he actually held the office. The court may then ban him from the office for up to ten years.

Conclusion

Director liability rests on a simple principle. A managing director is not liable for business failure, but for how he made decisions. Anyone who acts loyally, on an informed basis and with the care that another reasonably diligent person in his position would exercise is protected by the business judgment rule, even if the decision ultimately harms the company. Anyone who holds the office only formally, conceals a conflict of interest or decides without the necessary information risks having to compensate the company for damage and to surrender any benefit obtained. He also risks liability to the company's creditors for its debts under Section 159(3) of the Civil Code. In insolvency, there is the further risk of having to top up the insolvency estate under Section 66 BCA and of disqualification from office. Because the burden of proof lies on the director himself, we recommend keeping ongoing documentation of the decision making process. For significant or risky decisions, it is advisable to involve an expert adviser in good time.

For more information, please do not hesitate to contact us at:

JUDr. Mojmír Ježek, Ph.D.

ECOVIS ježek, advokátní kancelář s.r.o.
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e-mail: mojmir.jezek@ecovislegal.cz
www.ecovislegal.cz

ECOVIS ježek, advokátní kancelář s.r.o.

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