Changing a company’s CEO is always a significant step that requires attention to legal details. An improperly executed termination can lead to lawsuits and financial losses, while ignoring damages caused by a dishonest director can result in direct harm to the business. Let’s examine how owners can part ways with a top executive in accordance with the rules and protect their interests, taking into account current case law.
General Dismissal Procedure
The law, specifically the Labor Code, provides for various grounds for dismissing a director. These may include mutual agreement, expiration of the contract term, systematic failure to perform duties, absenteeism, embezzlement, or other gross violations.
A specific ground is separately listed in paragraph 5 of Article 41 of the Labor Code—the termination of an official’s powers. This allows owners (members of an LLC, shareholders of a joint-stock company) to dismiss a director simply by a resolution of the general meeting, without specifying a specific reason. However, such dismissal is possible only on the condition that the director is paid severance pay in an amount not less than six times his or her average monthly earnings. The Supreme Court has repeatedly confirmed the legality of this approach, provided that the procedure is followed and compensation is paid.
Regardless of the grounds, the dismissal procedure must be flawless. It all begins with a decision by the authorized body (usually the general meeting), which is recorded in the minutes in accordance with the articles of association and the law. Based on the minutes, a dismissal order is issued, which the director must acknowledge in writing.
On the last working day, a full settlement is made (salary, vacation pay, severance pay), and, at the employee’s request, an entry is made in the employment record book.
The final step is to update the Unified State Register regarding the change in leadership.
Failure to comply with any of these steps may result in a legal challenge, the reinstatement of
the director’s reinstatement, and the payment of his or her average earnings for the period of forced absence.
The Director’s Liability for Damages: When and How to Recover Them?
A company’s director, acting on its behalf, may cause harm to the company through their actions or inaction. The Civil Code of Ukraine provides for the obligation to compensate for property damage caused where there is fault. However, recovering damages from a director is a complex process that requires the company to present a strong body of evidence.
For the court to grant a claim for damages, the company (plaintiff) must prove the existence of all elements of a civil tort: the director’s unlawful conduct, the existence and amount of damages, a causal link between the conduct and the damages, and the director’s fault.
Unlawful conduct includes violations of the law, the articles of incorporation, a contract, or fiduciary duties (to act in good faith, reasonably, and in the company’s best interests).
The damages must be actual and substantiated by documentation (financial statements, audit reports, etc.).
Causal connection means that it was the director’s actions that caused the harm.
Fault refers to intent or gross negligence—a failure to exercise the due care that a prudent manager would have exercised.
Case law demonstrates a variety of situations in which directors have been held liable. For example, in Case No. 914/3433/21, the Supreme Court upheld the validity of recovering damages from a director who, while having a conflict of interest, unjustifiably awarded himself an inflated salary without the owners’ approval. In another case (No. 910/12803/18), the court found unlawful the actions of a director who sold the company’s property at an undervalued price without conducting an independent appraisal and without the consent of the general meeting, which resulted in direct losses to the company.
Additionally, a basis for recovering damages may arise from a director entering into contracts with terms that are clearly disadvantageous to the company or with “fictitious” counterparties, indicating a lack of due diligence and prudence (as an example, one can cite the general approaches set forth in the Resolution of the Supreme Court of Ukraine dated February 19, 2019, in Case No. 911/637/18, which emphasized the need for economic justification of decisions).
At the same time, the courts clearly distinguish between culpable actions and ordinary business risk. A director is not liable for unsuccessful business decisions if they were made in good faith, based on sufficient information, within the scope of their authority, and with due diligence. The standard for his conduct is loyalty to the company and the avoidance of conflicts of interest.
An important factor is whether the director’s decisions were approved by the corporation. If the decision that led to losses was properly approved by the general meeting or the supervisory board (provided that the director provided complete and accurate information), this may serve as grounds for exempting him from liability. Courts also carefully examine the provisions of the articles of incorporation and the director’s contract, as these documents define the scope of the director’s powers and duties.
How to Minimize Risks?
For business owners, a preventive approach is key: clearly define authorities, responsibilities, limitations, and decision-making procedures (especially regarding significant transactions and related-party transactions) in the articles of incorporation and the director’s contract. Implement effective control mechanisms—a competent board of directors and regular independent audits. Carefully document all decisions made by management bodies. If you suspect that losses have been incurred, immediately
initiate an internal investigation or audit to gather evidence.
Advice for directors: act solely in the company’s best interests, avoid conflicts of interest, and ensure that all significant or potentially risky decisions are approved by the authorized bodies and properly documented.
In Conclusion
Dismissing a director and seeking compensation for losses from them are complex legal processes that require attention to detail, an understanding of the law, and knowledge of current case law. Clear internal policies, adherence to procedures, and, when necessary, timely and qualified legal assistance will help avoid costly mistakes and protect the interests of both the company and its executive.
This article contains general advice and does not constitute legal counsel. Every situation is unique, so we recommend consulting a qualified attorney to address specific issues.
Author: Taras Onyshchenko, Barrister
Source: https://zib.com.ua/ua/166851-direktor_yde_yak_zvilniti_bez_problem_i_scho_robiti_zi_zbitk.html