Managers and Directors of Companies in Portugal

In the private limited liability companies

Office of managers continues up to termination by removal or resignation, without prejudice to the fact that the company’s memorandum or the act of appointment provides the duration of same.

In the public limited liability companies

The members of the board of directors are appointed for a term established in the company’s memorandum, which cannot exceed a time period of four calendar years, the calendar year when the directors have been appointed being counted as a full year; should such term not be established in the company’s memorandum, the appointment is considered as having been made for a time period of four calendar years, re-election being then allowed.

Although appointed for a fixed term, the members of the board of directors shall remain in office up to a new appointment.

In limited companies

Managers may not perform any business activity, on their account or on behalf of others, competing with that of the company.

Competing activities are understood to be any activities which are stated in a company’s corporate purpose, are carried out by a company, or which the members have resolved will be carried out by a company.

Consent by the company is presumed if the activity has been carried out prior to the manager’s appointment, was known by the members holding the majority of the share capital, the manager’s activity is disclosed, the manager continues to perform his duties for more than 90 days after the date of the resolution approving the company’s new activity, which competes with the manager’s prior activity.

A manager who breaches those statutory requirements may be removed from office with just cause and may be required to compensate the company for incurred losses. The statute of limitation of the company’s rights is 90 days as from the moment all members are aware of the activity carried out by the manager or, in any event, within five years as from the start of such activity.

Public limited companies

During the term of their offices, the members of the board of directors cannot perform any work either on a permanent or temporary basis, under an employment contract or as independent contractors, in their company or in the companies they hold or are controlled by their company or are part of the same company group, and cannot enter into any contract for the provision of such services after the term of their office as board members.

Unless they are authorized by the General Assembly, the members of the board cannot perform work as employees or independent contractors, or act on behalf or in representation of a company which is a competitor of their company.

In private limited companies

The manager has the right to receive a remuneration defined by the members, unless the articles of association establish otherwise.

The total or partial share of any profits of the company is not permitted, unless the articles of association contain a provision permitting a share of profits.

In regard to shareholder managers, the remuneration can be reduced by a law court on the request of any shareholder if they are deemed to be out of proportion with the work performed or with the company´s situation.

In public limited companies

The remuneration of each director is fixed by the shareholders’ general assembly or a committee appointed by the general assembly, taking into account the director’s duties and the financial situation of the company.

The compensation can be a fixed sum or be, in part, a percentage of the yearly profits, but the maximum percentage allocated to the directors must be authorized in the memorandum of association.

The managers and directors of a company should observe:

1. Duties of care, expressing availability, technical competencies and knowledge of the activity exercised by the company, as suited to the respective roles, and in this context employing the diligence of a vigilant and organized manager;
2. Duties of loyalty, in the interest of the company, taking into account the long term interests of the members and considering the interests of other relevant parties where the sustainability of the company is concerned, such as employees, clients and creditors.

Generally, the directors and managers are assigned a duty of bona fide, in the exercise of their duties, which encompasses strict compliance with all legal and contractual obligations.

The duty of Bona Fide comprises three fundamental duties:

1. Duty of care;
2. Duty of loyalty;
3. Duty of information.

Civil Liability

Translates into the duty of compensating damages incurred by illicit conduct; in other words, in breach of legal or contractual duties.

The general rule is that only the company’s share capital is liable for the payment of the company’s debts / liabilities and not the managers / directors’ assets.

For a director to be liable for a specific action, such action must have been taken in the exercise of his duties and in breach thereof.

The personal assets of the director may be liable for the debts of the company, or any other kind of damages caused by his/her actions, whenever there is a breach of legal or statutory rules.

To the Company

Managers and Directors are accountable to the company for damages resulting from actions or omissions in the breach of legal or contractual duties, unless they can prove that they acted in good faith.

As such Directors are liable to the company for:

• Damages caused by mergers, if they don’t evidence that they have acted with the diligence of a vigilant and organized manager;
• Violation of the duty of non competition with the company;
• Resignation without cause;
• Breach of the duty of the holding or controlling company not to acquire new stocks or shares of its subsidiary;
• Illegal acquisition of own shares;
• Failure by the parent company or principal company to act diligently in company groups.

To shareholders and third parties

This situation contemplates illicit behavior by directors which directly cause damages to the shareholders. In the case of direct damages caused to a member due to the illicit behavior of a director, the member is directly entitled to sue the manager for compensation of damages.

Directors are further Liable for:

• Breach of the duty to inform;
• Misusage of information.

To the Company Creditors

The Directors liability to the company’s creditors takes place when, due to malpractice, the company’s assets become insufficient for the payment of debts.

An action which is illicit, intentional and damaging must be present. For the illicit act to trigger liability, the agent must have acted with guilt. An action which is simply illicit is not sufficient: the illicit behavior must have been carried out with negligence or willful misconduct. Liability will take place when damages reach the company’s assets and render them insufficient for the payment of debts to the company’s creditors.

The legal provisions aimed at protecting creditors can be found essentially in the Companies Code (Código das Sociedades Comerciais) and aim to guarantee the company’s share capital.

In fact, by preventing certain assets from being attributed to shareholders, be it for the purposes of distributing assets, or as a measure of safeguarding the share capital in case of amortization of stock, as well as by imposing the statutory reserve, the law ultimately protects the interests of the creditors, in so far as it avoids the reduction of the company’s assets.

Liability in Insolvency

A debtor which is not able to fulfill its due obligations is considered to be insolvent.

Insolvency is culpable when the situation has been created or worsened as consequence of misconduct or through serious wrong doing of the debtor or the debtor’s legal or de facto directors in the three years preceding the start of the insolvency process.

Insolvency is considered culpable when the directors are presumed to be at fault by (irrebuttable presumption):

• Destroying, damaging, rendering inoperable, hiding, or causing to disappear, all or considerable part of the company’s assets;
• Artificially creating or worsening debts and losses, or reducing earnings, expressly causing the company to enter into detrimental deals or for personal benefit or for the benefit of personal relations;
• Buying merchandise on credit, reserving or delivering the merchandise for payment at a lower price than is currently practiced, before the payment obligation is met;
• Making use of the Company assets for personal or third-party gains;
• Exercising, under the name of the company, if applicable, an activity for personal or third-party gain to the detriment of the Company;
• Using Company credit for purposes contrary to the interests of Company for personal or third-party gain, namely to benefit another company in which there is a direct or indirect interest;
• Continuing, for personal or third-party interests, a deficient operation, despite understanding or having the ability to understand that the operation had great probability of leading to a situation of insolvency;
• Failing to comply substantially with the obligation of keeping organized accounting, keeping fictitious or double accounting records or carrying out misleading records with relevant damages to the perception of the assets and financial affairs of the Company.

Because they reveal an elementary lack of care in the exercise of management duties, the failure to comply with the following duties, is also presumed as a case in which there is serious guilt, unless otherwise proven:

• The duty to apply for insolvency;
• The duty to draw up annual financial statements, within the legal deadlines and submit the relevant auditing body or deposit them at the Registry of Companies.

Exceptions to the principles of liability

In the cases where the directors or managers prove that their actions were based on rational business logic and were free of any personal interest, there will be no liability.

There are in fact situations in which the decisions and / or actions undertaken by the board of directors generate damages which are caused exclusively by the risks inherent to the nature of the business, even when undertaken by diligent directors, and so should be excluded from the scope of the directors’ liability.

Thus, care should be taken to know if:

• The decision was informed;
• The decision is free of any personal interest;
• Was taken based on reasonable criteria and according to corporate reasoning.

Other exceptions are provided for and have to do with actions based on a resolution of the shareholders, even if the decision can be annulled, or with board or management resolutions in which the agent did not participate or refused to approve. However, if one does not exercise their legal right to oppose a vote, they will be equally responsible for the damages incurred by the action undertaken which could have been opposed.

Liability for Criminal Offences and Infractions

The person who holds an office in a corporate body, namely in a commercial company, and acts in the exercise of its duties and authority, is always liable for any actions that constitute a crime.

In the Companies code (Código das Sociedades Comerciais)

The Companies Code specifically provides for several different types of crimes related to the conduct of boards of directors of companies, which may go from failure to collect contributions to share capital, to violations regarding the amortization of shares or stock, to illegal distribution of company assets and failure to propose a reduction of share capital.

These crimes may directly affect the company’s insolvency situation, in so far as they may cause or contribute towards a reduction of the company’s assets, and so should be legally restricted.

Penalties for these crimes are essentially monetary fines, although in the case of the breach of duty to propose a reduction of share capital, the law establishes a prison sentence of up to 3 years.

In the Insolvency Code (Código da Insolvência)

During insolvency proceedings, the court may acknowledge evidence of crimes, typified in the Criminal Code, committed by the directors or managers of the insolvent company.

In such a case, the judge should report the crimes to the Public Prosecutors Office (Ministério Público) so that this entity may proceed with the necessary investigations within the scope of the relevant criminal proceedings.

However, it should be noted that the effects of the qualification of the insolvency as culpable is restricted to the insolvency proceeding, and culpability and personal responsibility (be it civil or criminal) must be determined in different proceedings.

The conduct of directors which lead to the company’s failure and subsequent insolvency is not relevant for criminal purposes.

In the Criminal Code

The crimes established in the Criminal Code in connection with insolvency, are applicable to the conduct of legal or de facto directors.

Insolvency due to misconduct
This crime is punishable with a jail sentence of up to 5 years, or with a fine of up to 600 days.

Insolvency due to negligence
The sentence established for this crime is of 1 year in jail or a fine of 120 days.

Insolvency due to breach of trust

If the object of the criminal conduct is of:

• High worth, the perpetrator is punished with a prison sentence of up to five years and a fine of up to 600 days;
• Of considerable worth, the perpetrator is punished with a prison sentence of 1 to 8 years.

If the perpetrator received the object of the criminal conduct as a deposit as legally mandated for working purposes, job or profession, or as a tutor, curator or legal guardian, the person is punished with a prison sentence of between 1 and 8 years.

Fraud
Fraud is punishable with a prison sentence of up to three years or with a fine.

Aggravated Fraud
When the asset loss is of high value, Aggravated Fraud is punishable with a prison sentence of up to five years or with a fine of 600 days.

The sentence is 2 to 8 years of prison if:

1. The asset loss is of considerably high value;
2. The perpetrator makes a living by acting fraudulently;
3. The perpetrator takes advantage of a victim’s especially vulnerable circumstance, in regard to age, disability or illness;
4. The person who incurred the loss is left in a difficult financial situation.

Infidelity

A person who has been entrusted with the duty of disposing, administering or inspecting third party assets, and intentionally and seriously breaches their duties, causing relevant damages to those assets, is punished with a prison sentence of up to three years or with a fine.

Frustration of Credits

A director or manager who destroys, damages, makes disappear, hides or misappropriates any part of the company’s assets after an enforceable judgment is rendered, is punishable with a prison sentence of up to three years or a fine.

Favoring Creditors

The punishment for this crime is up to 2 years in prison or a fine of up to 240 days.

Minimum and maximum penalties can be increased by one third, both when the relevant actions lead to unpaid employment-related debts within court enforcement proceedings, or insolvency proceedings. The employment related nature of such debts justifies an increased protection thereto.

Tax Liability

Civil Tax Liability

The members of the board of directors, directors and managers and other persons which exercise legal or de facto management powers in corporate bodies and other entities with equivalent capacity from a tax standpoint are jointly and severally liable on a subsidiary basis with those legal persons and entities for:

1. Tax debts arising from facts occurring during their term of office, or which should be paid or delivered after the expiration of the term of office, provided that in both cases the assets of the person or equivalent entity are insufficient for the payment of the debts is their fault;
2. Tax debts of which payment or delivery deadline expired during their term of office; if they do not evidence that their lack of payment was not imputable to them;
3. Fines and surcharges imposed for breaches occurring during their term of office or prior facts, if the assets of the company or legal person became insufficient for their payment an it is their fault;
4. Fines or surcharges due to prior facts if the final decision imposing them was served during their term of office and the failure to pay is imputable to them.

Examples:

• Destruction or occultation of company’s assets;
• Use of the company and its assets for personal benefits or to benefit a third party to the company’s detriment;
• Conclusion of damaging businesses, lack of diligence in the collection of credits, etc;
• Continuing, for personal or third-party interests, a deficient operation, despite understanding or having the ability to understand that the operation had great probability of leading to a situation of insolvency.

Criminal tax liability

Breach of trust

The person who is required to withhold tax and fails to submit, in whole or in part, tax withheld at source, as per legislation in effect, is punished with a prison sentence of up to three years and a fine of up to 360 days. (…)

The facts described in the preceding numbers are only punishable if:

• Over 90-days have lapsed after the expiration of the deadline to submit tax withheld at source;
• The tax as reported to the tax administration through the corresponding tax return is not paid, with the applicable interest and a fine, within 30-days of receiving notice thereof;

In the cases provided in the preceding paragraphs, if the amount to be submitted does not exceed €50,000, the penalty is 1 to 5 years in prison and a fine of 240 to 1,200 days for corporate bodies.

Appointment

Managers are appointed in the memorandum of association or subsequently elected by means of resolution of members, where the articles of association do not provide for any other form of appointment.

The managers´ duties continue for as long as they are not terminated by virtue of dismissal or resignation, notwithstanding another duration being fixed in the memorandum of association or the deed of appointment.

The appointment must be registered with the Company Registry Office and it only becomes effective against third parties after the date of the respective registration.

Resignation

Managers are free to resign from office, which must be communicated to the company in writing. The resignation is only effective eight days after receipt of the letter.

Resignation without just cause is permitted by law, as long as advance notice deemed to be of reasonable length is provided. The resigning manager is obliged to compensate the company for any losses caused unless the length of time between the notice of resignation and the effective date is deemed to be sufficient for the company to recruit a replacement.

The resignation must be registered with the Company Registry Office and it only becomes effective against third parties after the date of the respective registration.

Removal from office

The members may decide on removing managers from office at any time. The articles of association may require a qualified majority or other such requirement to that end. If the removal from office has just cause, it can always be approved by simple majority.

The serious breach by the managers/directors of their respective duties and the incapacity for the normal performance of the respective tasks, constitutes just cause for removal.

If no indemnity is stipulated in the articles of association, a manager dismissed without just cause has the right to be awarded compensation for any losses incurred.

A member cannot vote on a resolution to remove the same from the managerial post held, with just cause.

The removal from office must be registered with the Company Registry Office and it only becomes effective against third parties after the date of the respective registration.