Director's Liability Under Norwegian Law

• Published date: 06 September 2023
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers, Shareholders
• Law Firm: Dalan Advokatfirma
• Author: Mr Svein Steinfeld Jervell

On personal liability of members of the board.

Under Norwegian law, representatives of the company, including board members, the company CEO as well as shareholders, may be held personally liable for damages caused by their actions or omissions on behalf of the company. Personal liability is especially applicable if the company is in financial distress, if the damage is caused to the company or if a claim towards the company otherwise would be meaningless or not compensate for the loss inflicted. An example of the latter is where the company is acquired based on misleading information.

This article is written for those contemplating putting forth a claim of personal liability against representatives of a company and for the representatives who have such claims brought against them. It is written based on our experience with board liability cases on behalf of our Norwegian and international clients.

If you have a similar case, and are contemplating procuring our legal services, please do not hesitate to contact me by email, through our chat services or by phone.

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1. Background and legal framework

Section 17-1 of the Norwegian Limited Liability Companies Act stipulates that board members, including the chairman of the board, as well as the CEO or shareholders, may be held personally liable for the economic damage they, in their role as representatives of the company, intentionally or negligently have inflicted on others. Section 17-1 states the following:

[Section] 17-1. Liability for damages

(1) The company, a shareholder or others may hold the general manager, a member of the board of directors, member of the corporate assembly, independent expert, investigator or shareholder liable for any damage which they, in the capacity mentioned, have intentionally or negligently caused such party.

(2) The company, a shareholder or others may also hold a party who, intentionally or negligently, has contributed to damage as mentioned in first paragraph, liable for the damage. Damages can be claimed from the contributor even though the person who caused the damage cannot be held liable because he or she did not act with intent or negligence.

Claims of personal liability are usually brought forth by the following entities:

1. The company itself
2. The company's creditors
3. Shareholders of the company
4. Other business connections such as suppliers or employees, and sometimes public authorities.

Personal liability presupposes that the board member or other representative negligently has breached the obligations that incur in their role as board member in accordance to:

1. The Norwegian Limited Liability Company Act, or
2. The company's articles of association.

Claim for compensation might also follow from a shareholder agreement, though such a claim would formally be grounded in contractual breach of that agreement, rather than from Section 17-1. A shareholder agreement often also stipulates provisions on penalty by default as well as exclusion as shareholder based on breach of the agreement.

The number of cases concerning personal responsibility has been steadily rising in Norway. The cases are often complicated, both on a legal and factual basis. They often result in economic distress or perhaps even personal ruin of the board member. This is especially the case if the representative is not insured.

The remaining article will deal with claims of personal compensation against board members. I would nevertheless like to emphasize that many of the same assessments apply for personal liability cases against the company CEO.

For cases brought against shareholders the assessment is somewhat different as the shareholder usually does not represent or act on behalf of the company in the same way. Cases against shareholders usually concern situations where the shareholder has misused the protection of limited liability which follows from the private limited company form, for instance through underfinancing the company.

1.1 What are the responsibilities and role of the board?

A personal liability case is based on a breach of the board members' duties. The starting point for such a claim would therefore be an analysis of which of the duties that fall on the board that has been breached. The Norwegian limited Liability Act Section 6-12 stipulates that the board is responsible for the following:

1. Proper management of the company
2. That the company's accounts are subject to satisfactory control
3. Adequate supervision of the CEO's general management and the company's activities, as well as
4. That necessary information is provided to shareholders and others, cf. Sections 6-12 and 6-13 of the Limited Liability Companies Act.

From our experience there are two main reasons why a board member breach his or her duties:

1. Reckless misconduct, for instance due to ignorance of facts or law
2. Wilful misconduct, for instance by wilfully setting aside the best interest of the company in pursuit of personal interest or other colliding interests.

1.2 Personal liability means an individual assessment

Even though each board member is held personally liable based on an individual assessment, the board members act as a collective body that act as a single entity through board decisions. The starting point for a personal liability case against a board member is therefore either;

1. that a negligent board resolution has been made, or
2. that the board has failed in reaching a necessary board resolution it should have made (for instance to declare bankruptcy).

Individual responsibility means that the board members may be held liable on an individual basis. This entails that some of the board members may be held personally liable, while others are viewed as not liable for the same actions. Whether there is reason for personal liability is assessed on a case-to-case basis. Relevant factors in the assessment are:

1. The board member's exact role in the liability triggering action: For example, were some members of the board dissented or been absent in the liability triggering board decision? Did some of the members prepare the decision or have a more active role?
2. Board member's term of function: How long has the board member been appointed and how involved has he or she been with the company? If the board member has functioned for a relatively brief period or if the person was called into capacity as a deputy board member (alternative director), it is for instance less likely that the person would be held accountable, even though the person participated in the damage triggering board decision.
3. The specific nature of the action: Was the economic loss caused due to indemnifying acts or omissions? What harm was done and to what interest? Was mandatory legislation violated? These questions are relevant in the assessment of whether the board member acted negligently, or not.
4. The degree of guilt. To what extent is the board member in question to blame? Is this a case of wilful misconduct, gross negligence, or negligence? Has the board relied on advice from an auditor, accountant, attorney or other professionals? Was the case prepared by a CEO or management and are these more to blame?
5. The general expectation for board member in question: What could be expected of the board member? What background does he / she have and what role do they have on the board? Are the members paid / professionals, or does the board consist of members who participate on a voluntary basis, for example in housing association boards, charities, sports clubs, etc.

The assessment of liability of the board's actions must ultimately be made based on the actual information that came to the board at the time they made their decision. This means that although the issue of board responsibility will be assessed retrospectively on the basis of a loss that subsequently arose, the assessment must nevertheless be based on the situation the board was in when the decision was made.

Nevertheless, the board has a duty to establish reporting systems, so they have sufficient information to make adequate decisions. If such reporting systems have not been sufficiently implemented, and that has subsequently resulted in erroneous decisions, the board members may be held personally accountable.

2. What kind of board liability cases do we see in Norway?

In recent years, the number of cases has increased, and currently consists of about 100 board liability cases per year. A general trait of the cases we see is that they are relatively complicated, both with regards to facts and law, and that legal expenses are relatively higher compared to other cases.

Another trait is that liability cases are often raised as part of the company's bankruptcy, either by individual creditors, suppliers, bankruptcy estates or - more exceptionally - by shareholders.

In Dalan law firm we see a variety of cases each year. There are nevertheless some trends that we would like to point out. Overall, in our experience, the most common liability cases in Norway are these:

1. The Board of Directors violates its duty to declare bankruptcy in time, cf. Section 6-18 of the Norwegian Limited Liability Companies Act cf. Section 287 of the Penal Code.
2. The Board of Directors provides incorrect or misleading information on the company's finances which results in economic loss for third parties (e.g. shareholders, suppliers and creditors who act upon that information).
3. A board member goes beyond his or her authority, assigned powers of attorney or otherwise violates mandatory legislation causing an economic loss to third parties.
4. There is a failure in establishing control routines for the company's activities, supervision and control of daily management and / or the CEO.
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