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Juridiskie pakalpojumi


The risks attached to unpaid work of a Board Member.

Nearly all natural and legal persons who engage in an economic activity encounter debtors who deliberately evade fulfilment of their obligations or attempt to do so in an unlawful or unethical manner.

It is emphasised, such behaviour by a debtor is wholly unacceptable and illegal. There are various legal instruments and institutions that protect creditors, assist with debt repayments, as well as resolve disputes between the parties. This may include litigation, bankruptcy applications, reinforcement of obligations, as well as other measures to ensure fair and just performance of all obligations.

In certain instances, the execution of a court decision is not possible where the debtor appears to have no assets that can be seized. Therefore, creditors conduct investigations into the debtor’s affairs to determine whether there may be any hidden sources of income. Within the scope of the creditor’s investigation, the debtor’s involvement or participation in related legal entities is assessed.

Sections 139.1-139.3 of the Commercial Law (in force until July 12, 2017) defined those legal and natural persons as “related parties” and established the procedure for entering into transactions with the aforementioned. On the other hand, Section 184.1 of the Commercial Law (in force after July 13, 2017) further enhanced the regulation to ensure a greater protection for minority shareholders.

A ‘related party’ is a shareholder of a company who has direct decisive influence, as well as a Board Member or Council Member. Similarly, their relatives, spouses, and in-laws, as well as legal entities in which the shareholder of a  company, a Board Member or Council Member, or their relatives, spouses, or in-laws have decisive influence and are considered to be “related parties”.

According to recent case-law, the absence of assets does not always indicate the impossibility of enforcement. In this regard, it was upheld that taking position a Board Member in legal entities of related parties “without receiving remuneration” can also be considered to be the concealed income of the debtor (please refer to the judgment of the Senate of the Republic of Latvia of October 29, 2020, in case No. C33432217, SKC-288/2020).

In aforementioned case, the debtor had no means of income or assets against which enforcement could be sought to satisfy the creditor’s claim. At the same time, it was observed that the debtor had been actively involved in the boards of various companies belonging to close relatives without receiving any remuneration. The Senate deemed such behaviour by the debtor as an atypical situation that requires a more in-depth explanation.

The Senate acknowledged that serving as a Board Member holds economic value, and a Board Member has the right to demand remuneration in accordance with Section 221 of the Commercial Law. Furthermore, the refusal to accept remuneration is considered a gift under Section 1912 of the Civil Law, and enforcement can be sought under Section 1927 of the Civil Law. Therefore, the rebuttable presumption of misconduct by co-participants (related legal entities) exists until adequately rebutted.

Upon reviewing the case in the court of cassation, the Senate ruled to annul the judgment of the appellate court, which had satisfied the creditor’s claim against the related legal entities in which the debtor held the position of Board Member (please refer to the judgment of the Senate of the Republic of Latvia of April 25, 2023, in case No. C33432217, SKC-38/2023).

The basis for the annulment of the appellate court’s judgment, was due to the fact that the court of the appellate court unjustifiably restricted the respondents’ right to rebut the presumption of misconduct by co-participants, thereby depriving the respondents of the opportunity to submit any evidence.

Finally, the Senate underlined one of the respondents was unjustifiably deemed a related party, therefore the presumption of abusive conduct by co-participants does not apply to this respondent, and the claimant has the obligation to prove the malicious actions of the mentioned respondent.


Key conclusions:

  1. Serving as a Board Member without receiving any forms of remuneration in multiple related legal entities can be considered as a gift, which creditors can seek enforcement for, and the related legal entities may be held responsible for the Board Member’s debt obligations.
  2. Misconduct by related legal entities is presumed, meaning that creditors are not obligated to prove the legal entity deliberately concealed the debtor’s income, allowing the Board Member to hold a position without remuneration.
  3. Creditors must prove the misconduct of the legal entity if it is not recognised as a related party under Section 184.1 of the Commercial Law.
  4. Related legal entities have the obligation to prove why the debtor did not receive remuneration for holding the position of a Board Member. Even payment of remuneration in a symbolic amount may be considered as a gift if it does not comply with the eighth part of Section 221 of the Commercial Law.
  5. To mitigate the risk of litigation, legal entities should carefully assess the compliance of Board Members’ remuneration (within the eighth part of Section 221 of the Commercial Law) if a natural person considered a related party is appointed to the Board Members’ seat of a legal entity.

June 13, 2023 by Agris Dēdelis, Associate

Juridiskie pakalpojumi

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