The paradigm of the orderly and judicious manager

Opinion piece by Bruno Magalhães published [in Portuguese] in the Vida Judiciária magazine in March 2024.

In a context of intense legislative and regulatory activity across various domains directly impacting business activities, we have been witnessing a profound and sometimes complex densification of what are intended to be best practices in corporate governance, encompassing derivative internal compliance procedures.

The legal and regulatory framework aimed at creating better transparency conditions for business activities and legal commerce, benefiting consumers and serving higher public interests—with implications for the prevention of money laundering and terrorist financing (ML/TF), anti-corruption efforts, and the challenges arising from the development of artificial intelligence, among others—has substantially expanded the traditional scope of duties for company management bodies and, consequently, the range of risk situations generating liability for both the company and its directors.

The duties imposed on directors develop primarily in their internal relationship with the company, particularly noting the assumption of social/business risk on different levels: the shareholders, susceptible to capital risk, and the management body, susceptible to administrative risk and civil liability rules for unlawful and negligent management.

In elaborating the general duty to manage and represent the company, members of the management body are primarily bound to fundamental duties of care and loyalty, as generally stipulated in Article 64 of the Companies Code (CSC), which sets the standard of the prudent and orderly manager as a measure of fault and illegality.

Article 64 of the CSC constitutes an open framework norm to be operationalized or concretized using other legal provisions. This refers to specific duties, contractual or legal, arising not only from the CSC but also from other laws, such as the duty not to engage in acts and transactions that disregard the company’s profit motive (Article 6 of the CSC), the duty to request the declaration of the company’s insolvency (Articles 18 and 19 of the Insolvency and Corporate Recovery Code (CIRE)), or the duty to convene or request the convening of a general meeting in case of loss of half of the share capital (Article 35 of the CSC), among many others.

Within the internal relationship with the company, the director is thus liable for the damages caused to it resulting from acts or omissions in breach of their legal or contractual duties (Article 72 of the CSC), with the assessment of fault tempered by business rationality criteria and the degree of information verified when making a management decision, reflecting the business judgment rule.

In their external relationships with other parties (creditors, the state, shareholders, employees, or others), various potential risk situations for the less orderly manager can be identified.

According to Article 78 of the CSC, directors are liable to creditors when, through culpable non-compliance with legal or contractual provisions aimed at their protection, the company’s assets become insufficient to satisfy their claims. This issue is intrinsically linked to insolvency law, particularly the incident of classification of insolvency as culpable and the obligation to indemnify (attributed to the de facto or de jure director) provided in Article 189(1)(e) of the CIRE.

Given the special legislation comprising the CIRE, director liability under Article 78 of the CSC will always be residual and applicable outside the insolvency scenario, or when it is not possible within the insolvency process, due to technical requirements of the classification, to declare it as culpable.

In external relationships, and subject to the verification of other civil liability prerequisites, directors are also liable to shareholders and third parties for damages caused to them in the exercise of their functions (Article 78 of the CSC).

In other areas of law, we identify the institute of tax reversal as a significant risk factor, traditionally and widely known. Subject to the verification of the established legal prerequisites for this purpose—(i) actual exercise of administration; (ii) proven insufficient assets of the company; and (iii) ascertainment of attributable fault to the director—members of the management bodies will be personally and subsidiarily liable for the company’s tax liabilities (Articles 22 and 23 of the General Tax Law and Articles 153 and 160 of the Code of Tax Procedure and Process).

More recently, within the ML/TF prevention regime, extensive duties/obligations (identification and due diligence, refusal, record-keeping, examination, collaboration, non-disclosure, training…) have been imposed on the so-called obliged entities, and thus their directors, ultimately responsible for compliance and implementation. The complexity and demand of the regulatory framework are such that they require the implementation of internal procedures suitable to the structure of the obliged entities, ensuring the necessary compliance conditions.

The director of the obliged entity is responsible for the application of policies and procedures and controls regarding ML/TF prevention (Article 13), promoting their approval, ensuring that the organizational structure of the obliged entity always allows the proper execution of these policies, appointing the compliance officer, etc.

In this context, both the ML/TF regime and the General Corruption Prevention Regime (RGPC) include their own sanctioning regimes. The liability of legal persons for the commission of an administrative offense does not exclude individual liability of the management body members or other individuals, such as the compliance officer appointed by management (Article 21 RGPC and Article 163 ML/TF).

It is precisely the recent densification of these (legal) duties of the director across various branches of law or specific sectors of activity that has raised the bar for the prudent and orderly manager, requiring an increasingly professionalized management activity and necessarily the adoption of internal procedures and mechanisms, the so-called compliance, aimed at preventing corporate and representative liability, or mitigating potential liabilities, varying in intensity and sophistication according to the circumstances inherent to the company itself (size and business volume, sector of activity, etc.).