Liability of uncompetitive activity of the manager of a limited liability company – Art. 142 of Commercial Law (CL)

The prohibition for performance of a competitive activity by the manager of the limited liability company (LTD) is a problem referring to the way of his management.

This prohibition is applied for the manager of LTD and it is created in one condition – only in case of disagreement from the company’s side. Article 142 of CL determines three limits for the manager of LTD, which are applied when there is performance of activity similar to the one of the company: prohibition to execute trade deals on his or somebody else’s behalf; to participate in general partnership (GP), limited partnership (LP) or LTD; as well as to hold position in management bodies of other companies.

As a result of the breach of the prohibitions under Art.142, item 1, the provisions of CL foresee manager’s liability as a compensation of the damages caused to the company in Art.142, item 3.It is a question of internal company relations that can be solved in accordance with the provisions of CL and the Constituent Act of the company.

The manager of the commercial LTD is a management body of the company. He organizes and manages its company activity in accordance with the law and the decisions of the General Meeting; he is responsible for the company activities and represents the company before all persons and authorities. One of the main responsibilities of the manager is to be loyal to the company.

The fact that one person is chosen as a manager of LTD means that the shareholders trust in him, so that is why there is an absolute prohibition for performance of competitive activity only when there is a lack of consent from the side of the company.

The manager of the limited liability company is its necessary and obligatory body. A main characteristic of the manager’s activity is that it is executive. The choosing of the manager needs to be delimited from his appointment. The first act is related to his constituting as a company body, while the second act settles the internal relations between the manager and the company. The functional connection between the choice and appointment consists of the fact that the chosen one accepts his position as a body when there is a contract for appointment and the latter shall be signed with a purpose to allow the manager to enter into his obligations as a body of the company.

The manager in principle is not into labour-legal relations with the company. In the content of the labour relations, there are rights and obligations, which are not inherent in principle to the manager of LTD (for example: the manager has not bear disciplinary responsibility under the Labour Code). The labour contract between the manager and LTD is not definitely excluded. The parties must be free to settle the relations between themselves as they wish. The type of the contract will reflect also in the volume of the property liability of the manager in case of causing damages to the company as a result of the execution of the manager’s functions regardless the nature of the damages. This responsibility will not be limited as per the rules of the Labour Code but will be realized as a civil one.

A rule in the realization of the liability is that a person, who has bound himself gratuitously, is committed with less stringency in comparison with the one who obtains a counter-execution of the agreed obligation. In case of breach the obligation under Art. 142 of CL, when there is realization of the management, gratuitously, the range of the due care that in any case will be the care of the good trader, should be reduced proportionally as well.

The manager should be responsible in case of causing damages in the breach of the prohibition for uncompetitive activity. The liability of the manager is property; it is possible only in case of non-execution of the manager’s obligations (action or inaction), occurring of a damage (missed benefits or a damage), casualty and guilt. It is possible to require from the manager to give a guarantee for his management in defense of the following remedy of the interests of LTD.

The property liability cannot be realized when there is no decision from the General Meeting of LTD for that. From the other side, when the manager causes damages during the execution of the decision of the General Meeting, he will not be responsible for them.

There is a possibility for a release from the obligation for non-execution of a competitive activity from the manager’s side. The agreement of LTD in this direction should be considered as positive, if it was known that when the manager was appointed, he had executed a competitive activity and it was not agreed or given explicit requirement for its termination. But in the hypotheses, when the manager likes to start a competitive activity, after he has started to perform his functions, he should be released from the obligation for non-execution of competitive activity in accordance with the provisions determined in the Constituent Act of the company. The possibility for withdrawing of the given consent for execution of competitive activity without limitation in time is in defence of the company interests.

The release from the manager’s responsibility shall be done through a decision of the General Meeting. The approval of the report on the company activity incorporates the release of the manager from responsibility under Art. 142 of CL as well. Since the legal regime of the responsibility is of imperative nature, the shareholders cannot decide whether the manager will be limited liable or will be liable in lighter conditions. In this connection, the release of the manager from liability in the breach of the prohibition of the uncompetitive activity for future period of time is inadmissible.