Recovery of damages from corporate officers is always rather a challenging task in practice. Normally, companies face difficulties while proving the fact of director's wrongdoing or a causal link between potential wrongdoing and a company's losses. That is why companies in Ukraine were losing the vast majority of damages claims that they pursued against their officers.
Nevertheless, a research of case law of the Supreme Court proves that winning a damages case against a top-manager is still possible and the number of successful cases grows. In this article, we analyse several judgements of the Supreme Court where the employers succeeded with their damages claims against former corporate officers.
Case No. 1. CEO transferred subsoil use permit to his own company
On 27 November 2019, the Supreme Court issued a decision (case No. 910/20261/16), where for the first time in Ukraine the Court granted the company's claim for recovery of damages from its former CEO.
In this case, the CEO transferred the company's permit for the subsoil use to another company, which caused damages to his employer, as the latter lost possibility to continue its subsoil use activities. Moreover, the courts established that the CEO was also a CEO of the new holder of the subsoil use permit. Thus, by transferring the permit, the director made profit for his own company.
In the course of proceedings, the claimant sought to recover UAH 4,3 million in damages, which included the cost of the lost permit, geological information the company owned and the price of the mining equipment, that the CEO leased to his own company and did not return to the lessor. However, the company did not present sufficient evidence of other damages, except for the loss of the permit cost. Thus, the courts satisfied only the claim to recover damages amounting to the cost of the subsoil use permit in the amount of UAH 1.5 million.
While issuing its decision, the Supreme Court made the following conclusions:
Case No. 2. CEO carried out transactions that had no economic benefit for the company
In this judgement of 24 June 2020 (case No. 922/2187/16), the Supreme Court upheld the decisions of the lower instances courts and ruled in favor of the company due to established violation of the fiduciary duty by the company's former CEO.
As it follows from the judgement, the company filed a damages claim after it revealed that its former CEO regularly purchased services for the company from several private entrepreneurs, which services appeared to be irrelevant for the company. Particularly, the services related to agriculture activities, while the company produced transport vehicles. The company had serious doubts as to whether the services of the private entrepreneurs in question had any relevance or benefit for the company's activities and a forensic examination report confirmed that such doubts were reasonable. Instead, the director failed to prove any connection between the services he regularly purchased and the company's operations.
In this case, the Supreme Court reached an important conclusion regarding importance of fiduciary duty of chief executives. The Court emphasized that, apart from a formal duty to act within the limits of their powers, chief executives are expected to act in good faith, reasonably and to the interest of the company. The company and its chief executive are in fiduciary relationship and that is why the wrongful conduct of a director shall not be limited to failure to perform their formal obligations and not to exceed their corporate powers. In addition, the violation may express itself in dishonest performance of such duties without taking into account normal business risk or with prioritizing personal interests over interests of the business or in making obviously wasteful and reckless decisions. The Court pointed up that a chief executive is responsible for taking appropriate care of the company, which means that he must act with necessary diligence and demonstrate reasonable care about company's activities, using all necessary professional skills.
Consequently, even though the CEO formally acted within the limits of his corporate powers, the Court confirmed the company's rights for recovery of damages due to violation by the CEO of his fiduciary duties. As the result, the company succeed with recovery of nearly UAH 22 million, amounting to the total of payments for the services that had no economic benefit for the company.
Case No. 3. The CEO terminated land leases of the company and re-registered them for his own company
In this judgement of 9 September 2020 (case No. 905/1347/19), the Supreme Court established that the CEO of the company terminated the land leases of the company before their scheduled expiry and re-signed the leases on behalf of another legal entity, where he was a founder and CEO.
The Supreme Court confirmed that, even despite absence of any express prohibition for similar actions in the company's by-laws or other documents, the CEO violated his fiduciary duty and failed to act in good faith in respect of the company. However, the Court returned the case for a new trial due to certain procedural violations by lower-instance courts.
It may be expected that the above-referred decisions of the Supreme Court will serve as a guidance for further development of judicial practice in similar cases, especially the conclusions regarding fiduciary duties of top-managers.