While management errors and abuse are one of the main causes of insolvency, company owners have limited means to mitigate such risks as long as art 55 of Companies’ Law (CL no. 31/1990) protects the third parties involved, when administrators breach their mandate, at the expense of company owners. In these circumstances, how can owners protect themselves from the negligence and abuse of administrators?
Art 70 of CL states that administrators are entitled to perform all necessary operations for meeting the company’s statement of objects (i.e. the NACE codes). However, this mandate is limited to what is set forth within the articles of incorporation (AOI). Therefore, administrators are bound both by a contractual mandate (see art. 70) as well as by the legal provisions regulating companies’ interests for public order purposes, according to art. 72 of CL.
Art 55 of CL takes a different stance on the actual extent to which a company is engaged by its administrator if he/she exceeds his/her mandate. Based on art 55 the company is liable for the administrators’ actions in relation to third parties acting in good faith. This stands even if the administrator’s powers have been restricted within the AOI and even if these restrictions have been made public with the Romanian Trade Register. What is the reasoning behind this? The authorities explain that it would be excessive and inappropriate for the third party involved to verify the administrator’s mandate every time they do business together.
Legally speaking, art 55 transposes the provisions of art 10 of Directive 2009/101/EC. The rationale behind the European provisions is to primarily protect third parties. Thus, the regulation aims at limiting as much as possible the circumstances where the actions performed on behalf of the company are not valid. This is why mandate restrictions for administrators set by company owners to mitigate their own risks are overruled by art 55.
Various rulings on this matter show that the rationale behind art 55 prevailed in court. For instance, in the case of a limited liability company (SRL) where the two administrators were managing based on dual signature, the court ruled that the company was still liable for the administrator’s actions in relation to third parties, even if in this particular case only one administrator signed off the papers. That was because the liability for breaching mandate restrictions set by company owners is of secondary importance: what comes first is protecting the interests of the third party involved, provided that the latter acted in good faith. Another ruling had a similar outcome.
When the owners of a company capped the value of the contracts that the administrator could sign (through an addendum to the AOI), the court ruled that the publishing of the addendum does not imply that the third party is automatically informed of it . Therefore, even if the restrictions upon the administrator’s mandate have been made public, they do not safeguard owners’ interests.
What can the company owners do then?
One of the few ways in which company owners can protect themselves against the negligence and abuse of administrators is to have the administrator introduce a clause in any contract that he/she signs off, stating the limitations of his/her mandate. This should prove that the third party was properly informed of the extent of the administrator’s mandate. However it is unlikely that such clauses will be introduced in all agreements concluded by an administrator acting in bad faith.
Another solution would be for the company to purchase a Directors & Officers (D&O) insurance policy. Such policies cover the liability of company managers who wish to be protected from claims which may arise from the decisions and actions taken within the scope of their regular duties. Should a company go bankrupt, D&O may often be one of its few assets, providing the shareholders have a way to recover a part of the loss. However, a D&O policies do not cover fraudulent, criminal or intentional non-compliant acts.
Initially published on hg.org.