Company goes bankrupt – does the board member pay out of pocket?

When a company becomes insolvent, the risk for a board member becomes personal. Creditors have not recovered their money, there are no funds in the company’s accounts, and the administrator begins to assess whether losses can be recovered from the former management.

This is not a rare situation. Data from the Insolvency Control Service shows that in 2025, 269 insolvency proceedings for legal entities were declared in Latvia. Even more significantly – in 52% of cases, a report on the non-existence of assets was drawn up. This means that in more than every second such process, the company effectively has no assets from which to cover creditor claims. In 2025, unsecured creditors recovered an average of 20 cents for every euro. In such an environment, claims against the board become a practical rather than a theoretical risk. (Insolvency Control Service)

In a recent regional court judgment, the court again addressed the issue of board liability – the administrator sought to recover losses from a former board member that the company had failed to pay in taxes, arguing that this amount arose due to the board’s inaction. The court of first instance granted the claim in full. The appellate court corrected this approach and recovered only the late payment interest, dismissing the rest of the claim. This is a story about the boundary between a company’s debt and the personal liability of a board member.

A company debt alone is not enough

The main emphasis – in this case, the court only granted the late payment interest from the total claim (tax debt), as the administrator had not proven that registration in the VAT register (which the board member had failed to do despite meeting the criteria) would have reduced the tax amount. The principal tax debt exists regardless of the board member’s actions – liability is created only by the delay and sanctions, which are direct consequences of inaction.

The court recalled a fundamental principle: a board member is not automatically liable for everything the company has failed to pay. For board liability to arise, three things must be proven, namely (a) the company has suffered losses; (b) there was a specific action or inaction by the board member; (c) there is a causal link between this conduct and the losses. Only then does the board member have the obligation to prove that they acted as a fair and careful manager.

The appellate court concluded that in this specific case, it was not sufficiently justified how the board member’s actions would have caused the entire claimed debt. In other words – not every company obligation becomes a loss created by a board member just because the company later goes bankrupt.

However, the court also recognized the opposite: if board inaction causes an increase in additional liabilities, such as late payment interest, this part can indeed become a personal liability. In this case, it was specifically the late payment interest for the untimely payment of taxes that was recognized as a direct consequence of the board member’s inaction.

It can be concluded from this judgment that a board member is not a guarantor for all of the company’s debts, but they can be held liable for the consequences they have created through delay, passivity, or improper control. The court emphasized another crucial aspect – the grounds of a claim cannot be expanded during the course of litigation. If a claim is brought regarding one specific action, the court cannot base liability on other circumstances that were not properly specified in the claim.

This is important for both parties. The administrator must formulate the claim precisely. The board member, in turn, must look not only at the amount but also at whether the claim explains the chain of loss causation at all.

To avoid getting into such situations, a board member’s protection begins not in court, but in daily management. Practically, this means: (a) documenting significant decisions; (b) systematically monitoring deadlines and obligations; (c) acting in a timely manner in case of financial difficulties; (d) preserving evidence that decisions were made in the company’s interest; (e) not neglecting situations where obligations may increase due to delay.

A company’s insolvency does not in itself mean that a board member will have to pay out of pocket. However, it creates an environment where the board’s actions will be evaluated with particular care: debts do not constitute a fact of personal liability, but they can be formed by proven inaction with specific financial consequences.