Financial uncertainty is becoming a growing concern for businesses across various industries. Increasing payment difficulties and financial strain are no longer limited to smaller companies. Over the past two years, the number of bankruptcies in Finland has increased significantly, with little indication of immediate improvement.
In this challenging economic climate, boards of directors of limited liability companies face increased scrutiny regarding their actions and decision-making. When financial challenges arise, directors are expected to take proactive steps to identify and mitigate risks, adjust business strategies, and manage liquidity effectively to prevent financial distress. Clear and transparent communication with shareholders and creditors during this time is also essential to maintaining trust and minimizing the risk of disputes. This article offers a brief overview of these responsibilities in the context of Finnish corporate law.
Key aspects of board liability
The board of directors is responsible for overseeing the company’s administration and ensuring the proper organization of its operations (general competence). Under the Finnish Companies Act, board members are required to act diligently in the best interest of the company. The role of the board of directors becomes particularly critical during a liquidity crisis.
Failing to act in accordance with the duty of care may expose board members to personal liability for damage caused to the company. In addition, board members may also become liable towards third parties, such as shareholders, creditors, or contractual partners. This liability arises when, in addition to negligence, there has been a breach of a specific provision in the Companies Act or the company’s articles of association. In some cases, board members’ liability may even extend to criminal liability.
When a company approaches insolvency, directors’ duty to consider creditors’ interests is emphasized. Directors must ensure that all creditors are treated fairly and equitably and avoid actions that could exacerbate financial difficulties. This includes refraining from taking on excessive debt, making high-risk investments or disposing of assets in a way that disadvantages creditors.
Best practices for directors
To effectively manage liability risks during financial challenges, directors should consider the following best practices:
1. Maintain robust oversight:
Regularly monitor the company’s financial position by holding frequent board meetings and conducting detailed reviews of cash flow, solvency, and liquidity.
2. Plan for contingencies and act decisively:
Develop and update contingency plans to address financial challenges. This may include securing financing, negotiating with creditors, and reassessing operational and financial risks. Timely and decisive actions can be critical in preventing further distress.
3. Document decision-making thoroughly:
Ensure that all decisions, particularly those addressing financial challenges, are based on informed evaluations (the business judgment rule) and are thoroughly documented. Finnish courts generally scrutinize board members’ actions against the objective standard of a “prudent businessperson” in assessing liability, making proper documentation of decisions and underlying materials such as risk assessments a vital defense if the proper conduct of the board is later questioned.
4. Engage external experts:
When necessary, seek advice from auditors, legal counsel, or financial experts. External assessments not only enhance decision-making and risk assessment but also provide documented evidence of due diligence in fulfilling board responsibilities.
In times of financial uncertainty, proactive and informed governance is essential to minimize risks and navigate financial challenges. By maintaining rigorous oversight, adaptability, and transparency, boards of directors can steer companies through uncertain times while safeguarding their own positions against potential liabilities.
For more information, please contact Salla Suominen and Vilma Makkonen.