Liability of Board Members for Infringing Damages to Corporation: Current Practice and Perspectives of Regulation

Abstract

The article is devoted to the liability of members of the board of directorate in legal entities for losses incurred by organizations or driving them into bankruptcy in Russia. The research seems to be important because of increased attention to corporate governance issues during the period of rising insolvencies and cases of bringing directors of the company to liability. Still the director’s offense in the situation of causing only damages and bringing the company to insolvency seem to be the same: breaching of duty to act reasonably and in good faith. The authors emphasize that current legislation does not provide clear mechanisms for establishing grounds for directors’ liability, complicating differentiation between “good faith errors” and abuses. One of the most debatable issues in the field concerning director’s liability is the problem of evaluation of sufficiency of director’s actions to meet the standard of good faith and reasonableness while approving a transaction. Difficulties also arise when proving facts of “culpable inaction,” and distinguishing between concepts such as “reasonable risk-taking” and “unreasonable behavior.” The paper contains an analysis of judicial practice, highlighting variations in courts’ approaches to determining directorial responsibility–from strict personalization of accountability to justifying their actions based on procedural compliance and formal competency limitations. Researchers propose developing detailed criteria for evaluating the conduct of board members tailored specifically to collective decision-making bodies, differing from universal requirements applicable to individual executives. The article reveals key legal barriers impeding effective functioning of the institution of board member liability and offer directions for future research and development of legal regulation of corporate governance.