Best intentions should not justify (punitive) legal risks
The economy downturn affects all of us, and decisions made based on the emotions caused by the downturn may go beyond expectations. Even when the original desire was to help only a family member in distress.
Here are daily examples of practice to look out for.
For example, a member of the board of a business company is approached by his relative with a request to get a loan from the company on terms that are in every way in favour to the company. The member of the management board alone decides to pay out the loan and does not see any concern, because the terms and conditions agreed in the contract do not harm the company. Unfortunately, for a member of the board such an activity under Penal Code art 201 may qualify as an embezzlement, because the member of the board acted in a (possible) conflict of interest and did not ask for the prior consent of the shareholders to sign the loan agreement and pay it out. The fact that the content of the loan agreement was in accordance with market conditions would not save either (see, for example, the explanations of the Supreme Court decision No. 3-1-1-23-14 p 19). What usually happens is that the loanee never repays the loan they receive. Later it turns out that the loanee had no intention of repaying the loan from the very beginning, which is why they were so generously offering good loan agreement terms. But for the loanee such an activity, may qualify as fraud according to Penal Code art 209 (1) (see, for example, the explanations of the Supreme Court decision No. 3-1-1-98-09 p 13.2).
The company, although economically active, according to the indicators, is on the course of producing losses and it seems that soon there will be not enough assets to cover these losses. The shareholders decide to put pressure on the board to improve the situation. The board is following the usual tactics and is starting to sell more eagerly than before. The cooperation partners are confronted with the indicators of the previous annual report, which are radically different from the current reality, and promise capabilities that do not exist in fact. That may also qualify as a fraud according to Penal Code art 209 (1) (see, among other things, the explanations of the Supreme Court decision No. 3-1-1-14-15 p p 48). Sales are increasing, but in fact the company remains in a fragile state, as the economy downturn sharpened the competition and, in the meantime, they had to cope with delivery difficulties. But at the same time, the business card of the company, the new annual report, still has to be presentable! It is only necessary to “contribute” a little to accounting, reflect, for example, transactions that are still in the negotiation phase or create claims that do not actually exist – therefore to violate the essence and thereby the accounting obligation, which is punishable under Penal Code art 3811 (1). A possible result is also the counterfeiting of accounting documents and the use of counterfeit documentation within the meaning of Penal Code articles 344 (1) and 345 (1), and the submission of incorrect information to the commercial register is punishable under Penal Code art 281 (1). However, despite the efforts of the board, the business is moving on a negative course, and the shareholders want to exit with as little damage as possible. Shareholders are then pressuring the board to sell the existing assets. The Management Board also does so, which in turn may qualify as causing insolvency under Penal Code art 384 (1).
Regardless, it is still possible to legally carry out transactions with close ones (although it would be advisable to avoid this), to prematurely conclude a shareholders’ agreement for challenging periods, to defend oneself contractually against supply difficulties or to restructure a business in its simplest sense, both economically and legally. Starting, for example, with larger creditors and continuing with the support expected from shareholders. It is never too late to deal with a problem, but you should always deal with it and avoid thoughtless decisions. A momentary return, a moment of weakness or a wish to give up should not outweigh the (punitive) legal risks.
Jaanus Stern / LEADELL Pilv Advokaadibüroo attorney-at- law