Director Liability for Corporate Debts

Under Swedish law, directors (and under certain circumstances, other company representatives) are liable for corporate debts if they fail to take certain steps despite grounds to believe that the corporation's registered share capital is impaired by more than 50 %. Wow, that was a mouthful! It's not as complicated as it sounds. Let's look at the various components seperately. What's registered share capital? It's simply an amount that you get by multiplying number of shares outstanding by the par value per share. For example, if the corporation issued 1,000 shares at a par value of 100 SEK per share, the registered share capital is 100,000 SEK. When is it impaired? When shareholder equity is less than the registered share capital. Equity is the amount left over when all corporate debts are paid. So, if the company has 200,000 SEK in assets and 100,000 SEK in debts, its shareholder equity is 100,000 SEK. If it's shareholder capital is 100,000 SEK, no problem- it's registered share captal is intact. On the other hand, if shareholder equity is 95,000 SEK and registered share capital is 100,000 SEK, it's share captial is "impaired."

Back to the formula described above. If the directors have reason to suspect that the share capital is impaired by more than 50 %, they must take certain steps. The steps are: first, promptly prepare a special balance sheet and have the auditor review it. Second, if the balance sheet confirms their suspicion, call a shareholders' meeting as soon as possible. Third, if the shareholders vote to continue, the directors must call a new shareholder meeting and present a new special balance sheet within 8 months of the first shareholder meeting. Fourth, if the second special balance sheet does not show that the share capital is 100 % intact, then the directors must petition the court to liquidate the company.

That's a lot to keep track of. But if the directors fail to take the necessary steps within the time limits prescribed, they are personally liable for corporate debts that arise after their failure. A director of a construction company learned this the hard way in a decision recently affirmed by a Swedish court of appeals. The director was owner of a construction company that was a subcontractor in a construction project. Between April-July 2004, the company bought products used in the project but was unable to pay for the products. The company was placed into bankruptcy in September 2004 and the supplier did not receive any payment in the bankruptcy proceeding. The supplier sued the director. The court found that the company's share capital was completely wiped out as early as March 2004. The company's monthly financial reports did indeed show that the capital was impaired. So that was that, the director was ordered to pay more than 300,000 SEK as well as the supplier's court costs of more than 100,000 SEK. The ruling has been affirmed on appeal.

The moral of the story: keep an eye on the corporation's financial condition and call a lawyer for advice if you suspect that shareholder equity is less than registered share capital.

Svea hovrätt, mål nr T 5925-08, den 7 juli 2010