DIRECTORS’ RESPONSIBILITIES IN DIFFICULT TIMES

Holding the position of executive director in Romanian companies comes with a series of responsibilities. With respect to these, when a certain required conduct, either an action or inaction, is not properly handled in compliance with the applicable legal provisions, it may trigger, among others, the legal liability of the director. The importance of observing the legal provisions regarding the director’s responsibilities and liability might sometimes be disregarded, or certain legal provisions might not be familiar for a the management of a company, in lack of a legal background. Especially in times of crises or in other difficult times, the business requires fast decisions, that cannot be fully assessed in a short time without specialized advice, and the potential legal limitations are not obvious or a recommendable or mandatory conduct from legal perspective does not seem necessarily relevant or logic from commercial perspective.

General obligations of loyalty, prudence and diligence

The directors of a Romanian company have, under Romanian law, the general duty of loyalty towards the company and to always follow the social interest of the company (i.e. not a personal interest), as well as the obligation to have a prudent and diligent conduct when managing the company. Given the generality of such provisions, there is no complete guide on how to be compliant, which means that in the day-to-day activity the directors should apply their own business rationale to decide that an action or inaction is in the interest of the company, to take the decisions with prudence and diligence, including to seek opinion of relevant legal, tax and other consultants when the case. If a director breaches such general obligations of loyalty, prudence and diligence, the company may claim damages from the respective director for the prejudice incurred by the company, however the company must be able to prove the prejudice. In addition, it should be noted that the conduct of the management may also trigger the liability of the company towards third parties or its criminal liability, as the deeds of the management performed on behalf of the company are binding for the company, being considered deeds of the company itself.

Below are presented few relevant examples of conduct that directors of a Romanian company should take into account, especially in times of difficulties:

Maintenance of solvency and management of business risk

The directors should make efforts to preserve the company’s liquidity and a healthy financial structure, which might imply a continuing assessment of the potential risks to the business (e.g. credit risk, market risk, operational risks, liquidity risk) and identifying potential mitigation or remedy solutions.

In current times when various crisis is threatening several industries, locally and globally, especially materials crisis, energy crisis, personnel crisis, without a prudent approach to monitor the potential risks and in lack of taking the appropriate measures, an ongoing business may easily be affected on short or long term.

Such current times also imply an increased attention to the relevant clauses in the commercial agreements and in structuring transactions for sale / purchase of companies, to reflect the potential business risks. Some examples of relevant clauses would be the force majeure clause, clauses regarding the party who bears the risk of the contract, clauses limiting the liability of one party, or structuring of the price in sale of companies depending on the future performance of the acquired target company.

Monitoring the potential support measures or facilities granted by the State in different industries, in times of crisis, should also be on the agenda of the directors.

Considering the current trends in corporate governance, such as ESG

Directors should take into account the current trends in corporate governance so as to benefit of potential advantages of such trends, such as easier access to financing, and to ensure that, on long term, the company will be aligned with the market standards (and will not be in a less favorable position from the competitors).

The ESG concept (i.e. Environmental, Social, Governance) sets a series of principles meant to be implemented by the companies in the day-to-day operation, for the purpose to achieve sustainability on long term. Implementing such principles will protect the general interest of society with respect to the impact of the companies’ activity on the environment, the companies’ relations with employees, customers and the community, as well as ensuring morality, law and fairness in the actions of the company.

Implementing the ESG principles will bring to the companies various advantages, such as easier access to financing or decrease of the costs of financing based on the ESG score, compliance with the regulatory aspects, and improvement of the general perception of the community and the clients on the company. Indirectly, they should improve the results of the company overall.

Obligation to convene the shareholders’ meeting in case of decrease of the net assets

The Romanian Companies Law expressly provides the obligation of the director to immediately convene the shareholders meeting in case the company net assets decreased to less than half of the value of the subscribed share capital, so as the shareholders to decide on the dissolution of the company or continuation of activity and the remedy measures to be taken with respect to the net assets.

Assessment of need for reorganization or insolvency and the conduct prior to reorganization or insolvency

According to the Romanian law it is presumed that a company is in need for reorganization when it is unable to pay its debts in the amount of more than RON 50,000 (approx. EUR 10,125) or 6 average gross salaries for more than 60 days.

In this case, several measures should be taken, such as payments and transactions should be limited to regular operating expenses (i.e. to carry out the regular current activities and payments to known creditors, which fall under the usual conditions of carrying out the current business, or tax payments) so as to avoid liability on the basis of unequal treatment of creditors and cancellation of certain transactions resulting in preferential treatment of creditors or decreasing the company’s value. Also, it should be assessed and identified possible preventing restructuring measures, such as capital increase or out-of-court restructuring measures.