Directors’ liability under the Norwegian Companies Act

A company, shareholder, or another party may claim compensation from a managing director, board member, member of the corporate assembly, investigator, or shareholder for loss that such person has intentionally or negligently caused in that capacity. This follows from Section 17-1 of the Norwegian Companies Act.

In practice, board liability is particularly important, and it appears that claims against board members are being pursued with increasing frequency. This is likely due to the fact that the duties of boards under the Companies Act have been clarified and strengthened compared to the previous legislation, and that the expectations regarding the professionalism of board members have become more stringent.

Examples of board liability

Liability for damages may arise, for example, where board members have participated in the company's decision to enter into a contract and should have understood that the company would never be able to fulfil its obligations under that contract. Entering into a contract under such circumstances may constitute a breach of the contractual duty of loyalty. Liability may also arise where a board member has contributed to a decision for the company to initiate legal proceedings despite the company being unable to cover the legal costs. In such a situation, the board member may have exposed the opposing party to such a significant risk that personal liability should be imposed. This may typically be relevant in relation to companies undergoing bankruptcy proceedings.

Personal liability under the Companies Act may also be triggered where the board has failed to fulfil its duty to supervise and monitor the company's management and operations. Such failures may include neglecting to ensure adequate control of the company's financial management and accounting, or failing to verify that the company's equity and liquidity are adequate and prudent.

Has the board member breached any duties under the Companies Act?

When assessing whether the conditions for liability under the Companies Act are satisfied, the starting point is whether the board member has breached any of the duties that objectively apply to the position. A breach of the required standard of care will exist where the board member, through action or omission, has violated a duty imposed by the Companies Act. Where such duties have been breached, there will generally be a presumption that the board member has acted negligently.

Each board member is assessed individually

Although liability may arise from the board's collective failure to fulfil its obligations, Norwegian case law establishes that liability is assessed individually. It is therefore each board member—and not the board as a collective body—who may be held personally liable. Accordingly, the question of liability requires a specific assessment of whether the conduct of the individual board member satisfies the conditions for compensation liability. If several board members meet the requirements for liability, they will be jointly and severally liable. This means that one board member may be required to pay the full amount of damages if the other liable board members are unable to meet their share of the obligation.

Source: Tore Bråthen, Selskapsrett, 6. edition (Oslo 2019)