Are you aware of your board responsibilities?

In recent years, there has been a sharp increase in the number of directors' liability cases that have ended up in the Norwegian courts. In 2018 alone, 105 cases of directors' liability were registered. It is particularly in cases of bankruptcy that directors' liability becomes relevant.

Directors' liability under the Limited Liability Companies Act is a core component of Norwegian corporate governance and is therefore an important topic for anyone who sits on the board of a Norwegian limited liability company. Board liability is about ensuring that board members are responsible for their actions (or failure to act) and decisions in a limited liability company, as well as the relationship between the board members on the one hand and the company, the company's creditors, owners and other external parties on the other. The Limited Liability Companies Act stipulates requirements and rules for board liability that it is important that all board members are aware of. In the event of a breach of the board's duties under the Limited Liability Companies Act, the board members may be personally liable, both financially and under criminal law.

Duties and responsibilities of the Board of Directors_200D↩

Liability for directors is particularly relevant in areas where the law specifies the board's objective duties. A breach of a statutory duty implies a presumption that the board member has acted negligently. The board member must therefore be particularly aware of his or her most important duties under the Limited Liability Companies Act. Breaches of internal guidelines and the company's articles of association may also be regarded as grounds for compensation.

The Board of Directors' main responsibility is to safeguard the company's interests and ensure that the company is run in accordance with applicable laws and regulations. According to sections 6-12 and 6-13 of the Limited Liability Companies Act, the board of directors shall, among other things, ensure proper organization and management of the business, establish plans and budgets for the company's operations, ensure that an annual report and annual accounts are prepared that give a true and fair view of the company's financial situation, keep itself informed of the company's financial position and ensure that the company's operations, accounts and asset management are subject to satisfactory control. The board of directors shall also supervise the day-to-day management, or where the company does not have a general manager, be responsible for the day-to-day management.

Other key duties of the Board of Directors are set out in sections 3-4 and 3-5 of the Limited Liability Companies Act. The board of directors is responsible for ensuring that the company has adequate equity and liquidity based on the risk and scope of the business. Furthermore, the board shall not dispose of the company's restricted equity (the most practical example is the company's share capital).

The Board of Directors has a duty to act if it must be assumed that the equity or liquidity is lower than justifiable based on the risk of the business and its scope. In such cases, the board of directors shall convene a general meeting, provide an account and propose measures to rectify the situation, or propose that the company be dissolved.

Failure to fulfill these duties may result in losses for the shareholders and that the company is in practice run at the expense of the creditor, which in turn may lead to liability for the board of directors. The board's liability is increased when the company is in difficulty.

Board members' liability for damages and criminal liability under the Limited Liability Companies Act

The most important rules on directors' liability for damages are set out in Chapter 17 of the Limited Liability Companies Act. Pursuant to section 17-1 of the Limited Liability Companies Act, directors, general managers, shareholders, auditors or members of the corporate assembly who intentionally or negligently damage the company in the performance of their duties may be liable for damages. Complicity in such damage may also result in liability for damages. It is worth noting that contributory liability is not limited to board members, the CEO or shareholder, and can thus affect anyone, e.g. employees of the company, when such person has contributed and liability is established for the CEO, board member and/or shareholder. Borgarting Court of Appeal recently handed down a judgment (LB-2023-22165) in which the court concluded that a project manager had such a central role in a failed refurbishment project that he, together with the general manager/chairman of the board, was held liable for damages to the developer on the basis of the contributory liability in section 17-1, second paragraph, of the Limited Liability Companies Act.

The claim for compensation can be made by the company as such, a shareholder or external parties such as creditors, contractual partners, public authorities and surrounding partners and stakeholders.

Lack of qualifications of the board member does not entail discharge from liability. Nor does the Norwegian Companies Act distinguish between shareholder-elected and employee-elected board members, so that the rules of the Act apply equally to all board members in the company. Each individual board member bears the risk of taking on a position for which he or she is not qualified. A board member will therefore not be heard on the grounds that he or she does not have the same qualifications as an experienced board member, or that the board member has only been elected by the company's employees. Conversely, it is conceivable that a particularly qualified board member may have a heightened responsibility, for example a board member who has a legal education/ license to practice law.

Board liability is individual, which means that board members in a limited liability company are personally responsible for their actions and decisions on the board. Individual board responsibility means that each board member must exercise their responsibilities and duties in accordance with the law, the company's articles of association and their best judgment. The director must act in the best interests of the company, conduct necessary investigations, make informed decisions and act in accordance with legal and ethical standards. If a director breaches these duties and causes damage to the company or its stakeholders, he or she may, if the conditions for indemnification are met, be held personally liable and be required to compensate any losses.

This division of responsibilities is an important part of the Companies Act to ensure proper management of the company and protect the interests of shareholders and other stakeholders. By imposing individual liability, the law seeks to encourage prudence, competence and ethical behavior among board members.

Intentional or negligent violation of the provisions of the Limited Liability Companies Act may also be punishable by a fine or, for aggravating circumstances, by imprisonment for up to one year. The criminal liability for board members may vary depending on the severity of the offense. Typical violations that may result in criminal liability include financial misconduct, misuse of company funds, false information and misleading accounting.

Directors' insurance

In today's complex business environment, directors are increasingly exposed to risks and liabilities related to their role in companies. To protect both directors and companies from the potential financial consequences of errors and omissions, directors' liability insurance has become increasingly important and commonplace.

Directors' liability insurance provides important protection for directors by reducing their personal financial exposure. It also protects the company against potential financial loss that may arise as a result of the director's actions. What is covered under directors' and officers' liability insurance will vary depending on the insurance company and the insurance policy, but will typically cover legal costs and costs of legal decisions and any claims for damages that may arise as a result of the board's actions. This provides board members with a degree of peace of mind and financial security, allowing them to carry out their role without undue concern for their personal finances. Matters that are not normally covered by the insurance are claims arising from fraud, embezzlement, bribery or other criminal acts.

The security provided by board liability insurance can also help to attract attractive, competent and experienced board members, as many potential candidates will be reluctant to join the board without satisfactory insurance and protection for their personal finances.

Our recommendation

To avoid liability, the board member should at all times act prudently by making reasoned and informed decisions in the best interests of the company, and not be motivated by their own special interests. If the board also ensures good organization of the business, good control routines and documentation of the decisions made, the risk of board liability will be reduced.

If you have any questions about the board's duties, tasks and responsibilities, please contact: ‍

Ketil Enerstad Sauarlia (Partner) / Ketil@agpadvokater.no / +47 417 62 807
Maria Heiberg Styrvold (Partner) / Maria.styrvold@agpadvokater.no / +47 941 34 556


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AGP is a law firm specializing in transactions, capital markets and corporate. Advising on board duties is one of our core competencies.

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