Corporate Liability of Directors: Modern Challenges and Court Practice

Author: Olena Andriyko, lawyer at F&P

In today’s business environment, corporate liability of directors is becoming an increasingly relevant topic: regulatory requirements are growing, supervisory bodies are becoming more active, and courts are increasingly setting precedents for holding directors personally liable. At the same time, a frequent question arises: where is the line between lawful management and personal responsibility?

The most common legal form for doing business in Ukraine is a limited liability company (LLC).

This form of business activity attracts attention because it minimizes risks for the founders of the LLC.

At the same time, the director of an LLC plays a key role in conducting business activities and, as a result, bears the greatest risks of being held liable.

It should be noted that the LLC’s director is liable under the applicable laws of Ukraine, the LLC’s charter and the employment agreement.

Liability is provided for by the current legislation of Ukraine.

The following are the most common types of liability under the current Ukrainian legislation for which a director may be held liable:

1. civil liability. Such liability provides for legal consequences of a property nature in case of non-performance and/or improper performance of duties, in accordance with Article 92 of the Civil Code of Ukraine.

Some of the most common types of violations by LLC directors are the following:

1) violation of the transaction procedure;

2) exceeding the limits of authority;

3) unfair, unreasonable, negligent actions that harm the LLC (may be committed without violation of the procedure, within the limits of authority.

One of the practical cases of bringing a director of an LLC to civil liability by recovering material damage caused by the director’s unfair and unreasonable behavior is the court decision in case No. 902/183/22.

For example, in case No. 902/183/22, the Company recovered from the director of the LLC the damages caused by the director’s unfair, unreasonable behavior, contrary to the interests of the LLC. In the course of the case, the Company provided adequate evidence of the director’s unlawful behavior and the purchase of goods at an inflated cost, which convinced the three courts of law that the Company’s position was correct. In this case, the amount of property liability of the LLC’s director, which was recovered on the basis of a court decision, amounted to UAH 7,408,875.00.

(link to the decision of the cassation instance https://reyestr.court.gov.ua/Review/113035699)

2. administrative liability. The LLC director may be held liable for violating the requirements governing the activities of legal entities, in particular, tax legislation, labor protection, violation of financial reporting and accounting rules, etc.

In addition, there is currently a widespread practice of imposing administrative penalties on the head of an LLC for maintaining military records at the enterprise.

In particular, in case No. 686/3272/24, the Khmelnytsky City District Court of Khmelnytsky Oblast dismissed the claim of the head of an LLC to cancel the resolution on bringing to administrative responsibility for violation of military registration at the enterprise. The court found that the director’s actions constituted an administrative offense.

(link to the decision of the Khmelnytsky City District Court of Khmelnytsky region https://reyestr.court.gov.ua/Review/118739201)

3. criminal liability. A director of an LLC may be held criminally liable for offenses under the Criminal Code of Ukraine, in particular: tax evasion; fraud or misappropriation of company funds; negligence that caused serious consequences; fictitious bankruptcy or misuse of company assets; and corruption offenses.

Modern challenges for directors: risks and recommendations

• Uncertainty of the scope of action. In many cases, legislation and court practice have not yet defined the exact limits of liability – especially in new businesses, start-ups, or companies with non-standard structures.

• Procedural requirements. Failure to comply with formal procedures (e.g., for major transactions, shareholder notification, meetings, etc.) significantly increases risks.

• Confirmation of the standard of action. The director often has to not only prove the absence of criminal intent, but also demonstrate that his decisions were reasonable, based on analysis, expert involvement or internal audit.

• Corporate culture and internal policies. In the absence of corporate standards, corporate governance policies, or codes of conduct, a director finds himself in a more difficult position to justify his position in court.

• The growing role of ESG and integrity. Investors, funds and international partners are increasingly paying attention to the environmental, social and governance (ESG) aspects of business. Violations of integrity standards or lack of transparency may become additional grounds for claims.

• Low level of unification of judicial practice. Different courts may assess the same facts differently, which increases the risks for directors in different jurisdictions.

To reduce the risks, we recommend:

1. Implement internal corporate governance policies (e.g., committees, audits, inspections, decision-making standards).

2. Document the decision-making process (memoranda, conclusions, risk assessments).

3. Monitor compliance with the powers of authority and check whether the transaction exceeds the limits of competence without appropriate approval.

4. Engage external consultants or experts on complex or risky issues.

5. Monitor court practice and update your legal position taking into account the new conclusions of the Supreme Court and other cassation instances.

Conclusion.

The role of a director today is not only strategic management of the company, but also personal responsibility. Legislation is being filled with new requirements, courts are setting precedents, and businesses are setting expectations for integrity and transparency. Therefore, it is important for managers not only to act “within the charter” but also to build a management system that can protect them from legal risks.

As a law firm, we are ready to assist you with analyzing the personal liability of directors, developing internal corporate governance policies, and preparing legal defense in disputes. Contact us for advice or legal due diligence.