LLC director’s salary: the Supreme Court’s clarification

Case circumstances 

The director established a new staffing table for the company by his order, in which among other things, he increased his basic salary. 

Subsequently, the company’s general meeting, by its resolution, dismissed the director from his position and brought a claim to the court seeking recovery of losses caused to the company by the director as a result of increasing his own salary throughout the period of validity of the contested order.  

The arguments of the parties 

The company states that the election of the executive body (the director) and the setting of the director’s salary fall within the exclusive competence of the general meeting, as this provision is laid down in the Articles of Association. Thus, in accordance with the Articles of Association, the company’s director was authorised to approve the staffing table and set the salaries of all employees, except for himself.

It should be noted that Articles of Association are the founding document of a legal entity; they are binding on all members of the company and set out the scope of powers of the company’s officers. 

Instead, the director argues that the company failed to prove the presence of all elements of the offense in his actions; therefore, his order is not unlawful.

Conclusions of the Supreme Court

In this case, the Court assessed the balance of powers between the company’s executive body and the general meeting. The Court also drew attention to the duty of a legal entity’s bodies to act solely in the interests of that legal entity.

After examination of the company’s Articles of Association, the Court noted that the establishment of the staffing structure and the director’s salary is indeed the exclusive competence of the general meeting. This was the key fact in determining the director’s unlawful conduct. Thus, the director may exercise all powers relating to the company’s day-to-day operations, except those falling within the executive competence of the general meeting. 

The Supreme Court also noted the presence of elements of an offence in the director’s actions, namely unlawful conduct, a causal link between the damage and the unlawful conduct, and culpability.

The Court found that the director’s unlawful actions consisted of issuing an order to amend the staffing table, pursuant to which he was to be paid additional funds. By taking such actions, the director exceeded his authority and caused harm to the company. The order was issued by the director in his own interests, rather than in the interests of the company.

The damage caused to the company consists of the direct financial losses it incurred as a result of paying higher basic salary in accordance with the director’s unlawful order. Consequently, it has been clearly established that the company suffered damage as a result of the director’s unlawful act. 

The cause of the damage was an unlawful order issued by the company’s director in excess of his authority and the consequence was financial losses (financial damage to the company).

Why are these findings important?

Firstly, the conclusion set out in the Ruling of the Supreme Court is important for the constituent bodies of companies, as it requires them to have a clear understanding of the limits of their powers and to be aware of their responsibility for adopting decisions that are inconsistent with the articles of association and/or law. Indeed, companies of various forms of ownership often face situations where their officials or bodies act contrary to the articles of association and the interests of the company. Such actions are unlawful and often cause losses to the company. Therefore, the court rules in favour of the company and the losses caused to a company are to be recovered. 

Secondly, the Ruling highlights once again the need to comply with the procedural rules of litigation, in particular to gather relevant and admissible evidence in support of one’s claims or arguments. Thus, in order to properly defend ins infringed right and recover the damage incurred, the company as a claimant must prove in court the existence of all elements of the offence. If even one element of offence is missing, liability does not arise. The defendant (official), on the other hand, must prove that their actions do not constitute an offence.   

Also we would like to draw attention to a common mistake in the application of the Supreme Court practice. The defendant in this case argued that the court of appeal had misapplied the Supreme Court’s ruling and cited certain case law. Thus, the failure of lower courts to take into account the Supreme Court’s conclusions in similar legal relationships constitutes grounds for a cassation appeal against the decision. However, it is important to realize that the Supreme Court’s conclusion to which the appellant refers in the cassation appeal, must be relevant to the circumstances of the case. We also emphasize that the Supreme Court does not assess the evidence in the case but only verifies the correct application by lower courts of the rules of substantive and procedural law. Consequently, attempting to compel the court to provide its own assessment of the evidence in the case on the grounds of an alleged failure to consider the Supreme Court’s conclusion in the aforementioned legal relationship is impossible and will result in the cassation appeal being dismissed.

Conclusions

The Ruling supplements court practice in disputes concerning the division of powers between a company’s governing bodies and the oversight of their activities. Consequently, it is important to take these conclusions into account, particularly in the following cases:

• when drafting the company’s articles of association;
• when analysing the company’s constituent documents; 
• for company officers in the performance of their duties; 
• if the general meeting has doubts about the legality of the actions of the company’s executive body, etc. 

Consequently, the director of a company is obliged to act strictly within the limits of the powers granted to him and must not act as a substitute for the higher governing body – the general meeting of members. Stepping outside these boundaries creates a risk that the director may be held liable for recovering the company for any losses incurred. This approach emphasises the importance of adhering to the corporate division of powers and acts as a safeguard against abuse in the company’s activities.