Board Member Liability in Sweden: Avoiding Personal Debt Risks

Running a business in the form of a limited company offers many advantages, perhaps most notably that the entrepreneur is not personally liable for the company's debts and thus does not risk their private finances if the company performs poorly. Therefore, it can come as an unpleasant surprise to many that as a board member of a limited company, you can, under certain circumstances, face personal liability for the company’s debts. In most cases, problems can be avoided by taking the right actions in time. In this article, Tobias Gårderyd, an associate lawyer at Fylgia Law Firm, explains what applies.

Do I risk having to pay the company’s debts?

This is one of the most common questions we receive when we, as bankruptcy administrators, meet with a limited company's board after a bankruptcy or provide advice to a company facing financial difficulties. Facing personal liability for debts that can amount to millions of kronor can be a financial disaster for those affected. At the same time, many, especially smaller, business owners, are unaware of what the rules are. The purpose of this article is to clarify the applicable regulations and provide some practical advice on how to act in order to avoid personal liability.

The general rule in Swedish law, as in most other countries, is that shareholders in a limited company are not personally liable for the company’s debts. A limited company is legally considered a separate entity that can own assets, incur debts, enter into contracts, act as a party in court, etc. Shareholders' risk is limited to the amount they have paid for the shares in the company, the so-called share capital. Since January 1, 2020, the minimum share capital that a limited company can have is 25,000 SEK.

This limited liability creates a risk that loss-generating companies continue operating to the detriment of the company’s creditors. If the company is insolvent (i.e., unable to pay its debts as they become due), the shareholders have already lost their invested share capital in the event of a bankruptcy. Therefore, shareholders have an incentive to continue operations and take greater business risks, as further losses will only affect the creditors. To counter such abuse of the limited company structure and give the board of loss-generating companies an incentive to wind up the business before the company becomes insolvent, Swedish company law has introduced rules on joint liability (medansvar), which means that board members and shareholders in undercapitalized companies can be personally liable for the company’s debts if certain procedures are not followed.

These rules require the board of a limited company, if there is reason to believe that the company’s equity is less than half of the registered share capital, to immediately prepare a control balance sheet. This obligation also arises if the company has been subject to a garnishment attempt and it has become apparent that the company lacks assets to fully pay the claim for which the garnishment was requested. The time the board has to prepare the control balance sheet can vary depending on the circumstances in each case, but a general rule is 1-2 months from when the suspicion arose. If the company operates a more extensive and complex business, the deadline may be longer.

The control balance sheet should be prepared in accordance with applicable annual accounts law and good accounting practice. However, certain assets may be valued at higher values than normally applicable for an annual report. If the company has an auditor, the auditor must review and express an opinion on the control balance sheet.

If the control balance sheet shows that the equity is less than half of the registered share capital, the board must immediately call an extraordinary general meeting to decide whether the company should enter liquidation. The control balance sheet and possibly the auditor’s statement must be presented at this meeting (the so-called first control meeting).

If the control balance sheet presented at the first control meeting does not show that the share capital has been fully restored and the shareholders do not decide that the company should go into liquidation, a new general meeting (the second control meeting) must be held within eight months of the first control meeting. Before the second control meeting, the board must prepare a new control balance sheet and, if there is an auditor, have it reviewed by the auditor.

If the control balance sheet presented at the second control meeting does not show that the share capital has been fully restored, the company is required to enter liquidation. If the general meeting does not decide on liquidation, the company’s board must, within two weeks of the meeting, apply to the district court for the company to enter liquidation.

If the board does not follow the procedures described above by failing to prepare the control balance sheet on time, call the first control meeting, or apply for liquidation if the share capital is not restored at the second control meeting, the board members become personally liable for the company’s debts incurred during the period of non-compliance. If the failure consists of the board not preparing the control balance sheet on time, the board members are responsible for debts incurred after the time when the control balance sheet should have been prepared. Even a shareholder can become personally liable if the shareholder participates in a decision at the second control meeting to continue the business despite the company being required to enter liquidation.

The liability period runs until the board takes the action it is overdue with. For example, if the board has not prepared the control balance sheet on time, the liability ends when the control balance sheet is prepared. If the board then fails to call the first control meeting on time, a new liability period begins from the time when the meeting should have been held.

According to case law, the liability period is also interrupted if, at an ordinary general meeting, an annual report is presented showing that the share capital has been fully restored, or if the company enters liquidation or goes bankrupt. However, the company’s application for corporate restructuring does not interrupt the liability period.

If there are objective conditions for joint liability, the board member can defend themselves by showing that they were not negligent. It is important to remember that the board member bears the burden of proof in this regard in a court process. Since the board of a limited company has a legal obligation to stay informed about the company’s situation, the board cannot defend itself by claiming ignorance of the situation.

As can be seen, the rules are complex, with tight deadlines that the board of a limited company must adhere to. To avoid personal liability, it is crucial for the board to take action early when the company starts facing financial difficulties. Therefore, do not hesitate to contact me or one of my colleagues in Fylgia's insolvency department if you, as a board member, need advice. We can also advise you if you are a creditor considering bringing a liability lawsuit against the board of a limited company.

About Tobias Gårderyd

Tobias has been part of Fylgia’s insolvency department since the spring of 2018 and specializes in insolvency law and procedural law. He primarily works with bankruptcies and disputes and has experience in these areas from his time as a court clerk at Södertörn District Court.

Do you have any questions about a board member’s personal liability for the company’s debts, or are you a creditor considering bringing a liability lawsuit against the board of a limited company? Do not hesitate to contact Tobias.