Are Board Members and Company Executives Liable for Negligent Breaches of Duty?
Board members and all of those involved with managing the business are liable to individual shareholders and creditors as well as the company, for losses caused through intentional or negligent breach of their duties. The same principles usually apply to the managing partners of a limited liability company (GmbH).
Duties of the board members and executives
The law does not provide a list of duties for managing directors or members of the board of directors. However, directors are required to exercise their duties with care and have a fiduciary duty to the company.
Board members and executives must act in a manner which can be objectively expected of a person in their position and of their abilities. The fiduciary duties include, in particular, a duty of secrecy and confidentiality, a prohibition on competition and a prohibition on self-dealing. In the event of conflicts of interest, a director must give priority to the company which he represents.
In accordance with the Business Judgment Rule, the courts are reluctant to rule on business decisions. Individual mistaken decisions which lead to losses are not of themselves breaches of duty.
Generally, they are considered part of doing business in a market economy, provided that reasonable risks are taken.
Liability for losses caused
Breaches of duty by directors will therefore only lead to liability where a loss in the legal sense is caused. Loss is measured by a reduction of the assets of the affected company. If the company would have had more assets or fewer debts without the breach of duty, then this will constitute a loss.
The claiming party must quantify and evidence the loss, which can be very difficult in practice. This is particularly true if potential claimants only have minimal information about the internal affairs of the business.
Alongside the company, each individual shareholder can bring a claim for the loss against one or more directors, where the shareholders’ claim will normally be for payment to the company. An exception to this is if shareholders suffer direct losses from acts of directors which are in breach of duty. If insolvency proceedings are commenced against the affected company, the company’s creditors are also entitled to bring a claim.
Swiss Federal Supreme Court rules that simple negligence is sufficient
Directors are only liable to the extent that they are at fault. The question of fault is to be judged objectively, meaning that which could reasonably be attributed to the director under the specific circumstances. Intentional as well as negligent acts are included in this. Negligence will exist where the damage was foreseeable by the director in the specific circumstances, meaning that the responsible person should have seen the risk of damage. According to case law of the Swiss Federal Supreme Court simple negligence is sufficient to establish liability.
A no-fault breach of duty will only be found if there are extraordinary circumstances.
For example, there will be no fault in the case of an unavoidable error or deceit by a third party. However, if the director should have been expected to recognize the deception, he will still be liable (BGer 4A_344/2020, 4A_342/2020 of 29.06.2021).