Supreme Court decision “CashCom” opens the door for claims against “shadow directors”

In a recent decision, the Swedish Supreme Court has clarified that the provisions of the Swedish Companies Act regarding personal liability for board members can also be applied to de facto representatives who in reality exercise decisive influence over a company.

The ruling has interesting consequences in situations involving so-called “shadow directors”. One consequence is that creditors with claims against companies in bankruptcy may potentially be able to direct their payment claims against more parties than was previously considered possible.

The Swedish Companies Act regulates how limited liability companies are governed. This is done by specifying which company bodies must exist, what duties they have, and what responsibilities are attached to the various roles. According to this basic structure, a company must have a board of directors with one or more members, and the board is responsible for certain tasks. Board members and the managing director may be liable to compensate the company, shareholders, and others for damage they cause in their roles. Corporate governance is thus organized so that specific responsibility is attached to the representative(s) of each company body.

There are situations where representatives of a company choose to arrange the governance in other ways than intended by the Companies Act. One such way is to give other individuals actual responsibility for the company’s organization and management, either instead of or alongside the company’s legal representatives (the board and the managing director). This has at times been to the detriment of creditors when companies have gone bankrupt and the board and managing director have lacked liquidity.

According to the Companies Act, a company must take certain measures in the event of signs of capital deficiency, in order to determine whether the company should be liquidated. One such measure is to prepare and have the company’s auditor review a balance sheet for liquidation purposes. If the board fails to take the required measures, personal liability may arise for the board under Chapter 25, Section 18, first paragraph of the Companies Act. The purpose of this rule is to protect the company’s creditors.

In addition to the liability for board members under the first paragraph of Section 18, personal liability under the second paragraph may arise for anyone who acts on behalf of the company with knowledge of the board’s omission as to its responsibilities. However, liability under the second paragraph is narrower than under the first paragraph. It has previously been unclear whether the liability under the first paragraph could be extended to include persons other than board members, as the statutory text only refers to board members. The Supreme Court has now resolved this uncertainty.

In “CashCom,” the Supreme Court reasons, based on a purposive interpretation of the law, that it is not possible to avoid personal liability under the first paragraph solely on the grounds that one is not a board member. Persons who, in practice, exercise decisive influence over a company’s operations – so-called de facto representatives and sometimes referred to as “shadow directors” – can therefore be held personally liable for the company’s obligations under the first paragraph. One example of such an obligation is personal liability for the company’s financial obligations which arise during a period when the board fails to perform its responsibilities according to the Companies Act, such as preparing a balance sheet to consider the risk of capital deficiency.

The ruling is a welcome clarification of a practically significant situation and is of particular interest to creditors with claims against companies in bankruptcy. It is possible that the decision will also have further implications for the interpretation of other liability provisions in the Companies Act.

Setterwalls continuously monitors the legal developments, and you are welcome to contact us for further information about the CashCom decision.