Assessment of damages for breach of the duty to file for insolvency by company directors

A former chair of a limited liability company was sentenced to eight months of imprisonment for breaching the duty under section 407 of the Penal Code to file for insolvency. Økokrim also brought a claim for damages on behalf of the bankruptcy estate. The District Court imposed liability for damages amounting to NOK 26.5 million, based on the reduction in the company’s financial position from the time insolvency should have been filed until it was actually filed. The Court of Appeal significantly reduced the damages, instead basing the amount on the difference between the dividend that would have been paid to creditors had insolvency been filed at the correct time, and the dividend actually received in the bankruptcy proceedings.

The Supreme Court, like the District Court, concluded that damages should be calculated based on the reduction in the company’s financial position.

The Supreme Court placed decisive weight on the fact that assessing damages based on the company’s reduced financial position aligns with general principles for determining liability under the Companies Act, and that it is also consistent with the fundamental insolvency law principle that the estate assumes and pursues the company’s claims.

One justice dissented, arguing that the duty to file for insolvency is established for the benefit of the collective body of creditors, and that only losses suffered by that collective can be claimed as damages.

The judgment clarifies how damages under section 17-1 of the Companies Act should be assessed in cases involving breach of the duty to file for insolvency when the claim is brought by the company’s bankruptcy estate.

Read the judgment from the Supreme Court (Norwegian only) (PDF)

Area of law: Tort law. Bankruptcy law. Section 17-1 of the Companies Act. 

Key paragraphs: 31–32, 57

Justices: Webster, Berglund, Sæther, Stenvik, Lund