Liability for Company Debts: When Are Executives or Board Members Personally Liable?
A capital company exists, among other reasons, to separate the company's assets from the assets of the people who run it. A creditor can, in principle, seek payment only from the company itself, not from its executive director or a member of the board. This principle, however, is not absolute. The Civil Code contains a provision that pierces this shield under certain circumstances and creates liability for company debts on the part of the statutory body, payable from that person's own assets. In practice, this provision comes up more and more often, typically once the company is insolvent, unreachable, or has no assets left, and the creditor is looking for anyone else who might still satisfy the claim.
This article explains how this statutory liability works, what conditions the creditor must prove, where the burden of proof lies, and what defences are available to the statutory body, including one that is often overlooked: limitation.
The Basic Rule on Liability for Company Debts and Its Exception
The key provision is Section 159 of the Civil Code (the "Civil Code"). Under paragraph 1: "Anyone who accepts the office of a member of an elected body undertakes to perform it with the necessary loyalty, knowledge, and care. A person is presumed to act negligently if they are not capable of exercising this due managerial care, even though they should have discovered this when taking up the office or during its performance, and fails to draw the consequences for themselves."
Paragraph 3 then adds the sanction that this article is mainly about: "If a member of an elected body has not compensated the legal person for damage that they caused it by breaching their duty in the performance of the office, even though they were obliged to compensate the damage, they are liable to a creditor of the legal person for its debt to the extent that the damage has not been compensated, provided the creditor cannot obtain satisfaction from the legal person."
The content of the duty of due managerial care is further specified by the Business Corporations Act (Act No. 90/2012 Coll., the "Business Corporations Act"), in particular Sections 51 to 53.
Four Conditions That Must Be Met at the Same Time
The wording of Section 159(3) of the Civil Code, read together with the settled case law of the Supreme Court (see, for example, the judgment of 30 June 2022, Case No. 27 Cdo 59/2022), shows that liability for company debts is not an automatic consequence of the mere existence of a company debt. Instead, it requires that four conditions be met cumulatively:
- a member of the statutory body breached their duty to act with due managerial care,
- this breach caused damage to the company itself,
- the member of the body has not yet compensated this damage, even though they were obliged to do so,
- the creditor objectively cannot obtain satisfaction directly from the company.
The Supreme Court has expressly stated that, in such proceedings, the court examines two relatively separate sets of questions: whether the creditor's claim against the company exists at all, and whether the conditions for the body member's liability for the damage caused to the company are met. According to the case law, these two questions do not have to be related in any way. The debt for which the statutory body is liable therefore does not need to have anything to do with the damage that member caused.
What Due Managerial Care Means in Practice
Section 51(1) of the Business Corporations Act provides that a person acts carefully and with the necessary knowledge if, when making a business decision, they could reasonably assume in good faith that they were acting on an informed basis and in the justifiable interest of the business corporation. The requirement also includes loyalty, meaning the duty to give the company's interests priority over one's own interests or the interests of third parties when making decisions.
Crucially, the court assesses only the decision making process, not the outcome. In its judgment of 19 July 2018, Case No. 29 Cdo 3770/2016, the Supreme Court formulated the so called business judgment rule: "Compliance with this duty must, however, be assessed from an ex ante perspective, that is, through the lens of facts that were known, or could and should have been known, to the executive director, had they exercised the appropriate care and made use of the available sources of information, at the moment the relevant business decisions were taken."
And further: "If a person acts with due managerial care, they are not obliged to compensate the company for damage, even if such damage arose as a result of that conduct."
The court must therefore not judge the executive director's decision with hindsight, knowing how things eventually turned out. The Supreme Court itself has a fitting phrase for this forbidden approach: a "general after the battle." A business failure that occurs despite a properly conducted decision making process does not, on its own, give rise to liability.
When a Company's Debt Is Also Its Damage
This is a question that comes up very often when assessing liability for company debts, and the answer cuts both ways.
On the one hand, the company's damage does not have to consist only of a physical loss of assets. According to the judgment cited above, Case No. 27 Cdo 59/2022: "Damage caused to the company may consist solely in the creation of a debt, regardless of whether the company has paid that debt." Typical examples include litigation costs, default interest, or a contractual penalty, that is, claims that arose as a result of the company's default or unlawful conduct and that would never have arisen if the company had been properly run.
On the other hand, a company's mere obligation to pay for something it actually used or received is not automatically damage. If the company pays a price for the performance received that corresponds to its value, there is no reduction in its assets, regardless of whether the legal title for receiving the performance was flawless or not. Damage only arises where the expense was unnecessary or uneconomical for the company, that is, where it did not bring the company a corresponding benefit in return. On this point, the Supreme Court stated in its resolution of 31 August 2022, Case No. 27 Cdo 1370/2021: "If the appellant could have found out, using the information and knowledge about the company's operations and needs reasonably available to her, that the company did not need the car, the rented flat, and the other services (their acquisition being unnecessary for the company), then acquiring them constitutes a breach of due care (the duty to act with the necessary knowledge and diligence), regardless of the fact that the price paid for them corresponded to the usual price."
Similarly, an earlier Supreme Court judgment of 16 December 2020, Case No. 27 Cdo 1238/2019, stressed that it is always necessary to assess the purpose and real economic benefit of the acquired assets for the company in light of its business activity and needs. If an act did not bring the company a corresponding benefit, it cannot simply be concluded that no damage arose.
In other words, whether a debt amounts to damage is not assessed across the board. What matters is the specific circumstance of whether the expense was in the company's interest and brought it adequate value in return, or whether it was simply an unnecessary expense.
A Formal Executive Director Is Not a Safe Executive Director
Many statutory bodies mistakenly believe that, by actually leaving the running of the company to someone else (a shareholder, a managing director, another executive director) and not getting actively involved in the company's affairs themselves, they reduce their own risk. Case law shows the opposite is true. In its resolution of 18 September 2019, Case No. 27 Cdo 844/2018, the Supreme Court stated: "If an executive director holds the office only formally, that is, does not actually perform it and simply leaves the fulfilment of the statutory body's duties to another executive director or to the company's employees, and does not even check how the company is being run and its affairs managed, it generally cannot be concluded other than that they are not acting with due managerial care."
Delegating certain tasks to someone else is fine in itself; an executive director does not have to be an expert in everything. However, the Grand Chamber of the Supreme Court, in its judgment of 11 September 2019, Case No. 31 Cdo 1993/2019, set out which duties still remain with the executive director even after delegation: "When selecting a third party, a member of the statutory body (executive director) must proceed properly, that is, must select in the way another reasonably careful person would (responsibility for the selection), must give the selected person a clear assignment, provide all necessary cooperation, and must manage them (responsibility for the assignment, direction, and cooperation), and finally must adequately supervise the performance of the delegated authority, not only personally but also through properly established control mechanisms (responsibility for supervision)."
Anyone who takes on the office and relies solely on another person's verbal assurances, without checking the actual legal and factual state of affairs themselves, does not reduce the risk they face. On the contrary, they create room for a finding that they did not act on an informed basis.
Who Must Prove What
How the burden of proof is divided is crucial in these disputes and often decides the outcome. According to settled case law (e.g., the Supreme Court's judgment of 4 September 2018, Case No. 27 Cdo 4163/2017, or its judgment of 7 December 2022, Case No. 27 Cdo 1659/2022), the roles are clearly divided:
- the creditor (claimant) bears the burden of both allegation and proof regarding the company's damage and the causal link between the statutory body's conduct and that damage,
- the member of the statutory body (defendant), by contrast, bears the burden of proof on only one question: whether they acted with due managerial care in the specific case.
This division is also confirmed by Section 52(2) of the Business Corporations Act, under which "if it is being assessed in court proceedings whether a member of an elected body of a business corporation acted with due managerial care, that member bears the burden of proof, unless the court decides that this cannot fairly be required of them." In practice, this means that passivity in court proceedings is extremely dangerous for a statutory body. If they fail to present any evidence of how, and on the basis of what information, they made their decision, they will generally not discharge their burden of proof, regardless of how strong or weak the other side's arguments are.
A Defence That Is Often Overlooked: Limitation
An interesting line of case law, and one that is very favourable for statutory bodies, concerns limitation. The High Court in Prague, in its judgment of 24 January 2023, Case No. 4 Cmo 129/2022, held that one of the conditions for this liability to continue is that the body member's duty to compensate the company for the damage still exists and has not become time barred. If the company's right to compensation against its executive director has meanwhile become time barred, and the executive director raises the limitation defence in the proceedings, the guarantee obligation under Section 159(3) of the Civil Code lapses along with it, regardless of whether the creditor's own claim against the company is itself time barred. The court based this on the reasoning that the opposite conclusion would force former body members to keep records of their decisions indefinitely, long after the company itself could no longer bring a claim against them.
This conclusion was subsequently confirmed by the Supreme Court in its judgment of 27 March 2025, Case No. 27 Cdo 2540/2024, which stressed that requiring a body member to remain ready at any time to defend their long past business decisions, even after the company's claim against them has already become time barred, would run counter to the purpose of the limitation regime. This is an important safeguard for statutory bodies: the subjective limitation period for a claim for damages is three years from the moment the person authorised to act for the company learned, or could have learned, of the damage and of the person obliged to compensate it. It is therefore always worth considering this defence in the proceedings.
Conclusion
Several practical conclusions follow from the above for executive directors and board members. Decisions, especially those involving higher value or risk, should be documented in writing, including what information was available and why the decision was made. When delegating tasks to another person or a co owner, it is not enough to rely on verbal assurances; the actual state of affairs should be verified from independent sources, especially where the rights of third parties are concerned (typically co ownership shares in real estate, or the written form of contracts). Formally handing over an agenda to someone else does not relieve a person of the responsibility to supervise it. And finally, even after leaving office, it is worth checking whether any potential claim by the company has already become time barred.
For creditors, conversely, a claim against a statutory body under Section 159(3) requires discharging the burden of proof regarding the damage and the causal link, which can, in practice, be more demanding than proving the company's debt itself. At the same time, creditors need to act in good time, bearing in mind that the limitation period for the claim for damages runs independently of any limitation affecting the claim against the company itself. Establishing liability for company debts on the part of an executive director or board member is therefore never automatic, but where the four conditions above are met, it remains one of the most effective tools available to a creditor left with nothing to recover from the company itself.
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