Appointment of an Interim Management of a Legal Entity due to Conflict of Interest (CC 69) - Law Firm Psarakis & Kefalas

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Legal Insight

July 2022

Archontoula Tsogia, LL.M

Summary: The need for heteronomy of the persons managing a legal person arises for reasons sometimes legal and sometimes factual. In a previous note we highlighted some of the most serious issues that arise in practice in the case of the appointment of a temporary management of a joint-stock company under Art. In the present note we will deal with the more specific case of the judicial appointment of an interim management due to the conflict of interests of the persons of the management with those of the legal entity.

1. Introduction

The absence of the directors of a legal person is not the only situation in which the legal person remains essentially headless and, consequently, the need for judicial intervention arises for the appointment of persons to take over its provisional management. In practice, it is often the case that the directors have conflicting or opposing interests with the legal person itself, with the result that their independence in taking some or all of their decisions is called into question.

2. The meaning of conflict of interest between the legal person and the persons managing it.

"Interest" is defined as the totality of the benefits, needs and aspirations, economic or otherwise, of a person, natural or legal, in its efforts to adapt, maintain and extend its acquis within the social and economic environment in which it operates. 'Conflict of interests' is identified in cases where, on the one hand, the needs and aspirations of persons diverge or conflict and, on the other hand, the satisfaction of one of the interests of both parties precludes the full or partial satisfaction of the needs and aspirations of the other. In this connection, consideration is given to the case where the interests of the persons managing the legal person diverge from or conflict with the interests of the legal person itself in such a way that it is impossible to satisfy the interests of both parties fully.

The interest of the person managing the legal person which conflicts with the interest of the legal person may be 'identical' or 'dissimilar' but is attributable to that person. The 'same' interest is defined as the personal (direct) interest (economic, ideological, moral or other) of the member of the management body in relation to a specific transaction of the legal person (e.g. the conclusion of a contract between the member of the management body and the legal person or a unilateral legal act of the manager addressed to the legal person, the participation of the member in a decision on his/her remuneration, etc.). An 'other' interest (of a third party) may be attributed as 'own' to a member of the management body if the two persons are linked by a legal relationship which justifies such attribution. This would be the case where a transaction of the legal person directly affects the interests of a third party, but the third party is linked to a member of the governing body of the legal person by a relationship of influence or control, whereby the benefit of the transaction is ultimately derived by the member of the governing body (e.g. a family or family relationship or a transaction of the legal person with another legal person controlled by the member of the governing body).

With regard to the case of appointment of a temporary board of directors of a company due to a conflict of interests, it is accepted that it exists both in cases where, based on specific legal provisions, there is a legal impossibility for the member of the board of directors to participate in taking a certain decision (e.g. Articles 66, 235 of the CC and Articles 10, 23a, 23 and 24 of the Law 2190/1920; moreover, Articles 19, 99-100, 98 and 109 of Law 2190/1920; Articles 19, 99-100, 98 and 109 of the Law 2190/1920) and in cases where the member of the board of directors is unable to take part in the decision-making process (e.g. Articles 66, 235 of the CC and Articles 10, 23a, 23 and 24 of the Law 2190/1920). 4548/2018) as well as in any other case in which the members of the Board of Directors breach the duty of loyalty they owe to the company (CC 288), whether they pursue the same or a different interest, contrary to that of the company (see CC 1392/2014 and CC 538/1998).

On the contrary, it is argued that there is no conflict of interest in cases where the directors are accused of violating laws, refuse to perform their duties (possibly in this case there is a lack of administration, which may justify the judicial appointment of an interim administration), engage in poor or defective management, refuse to bring an action against the dominant shareholder and the members of the management body, as well as in cases where their interests conflict with the interests of only certain shareholders. Indeed, it is widely accepted that the quality and efficiency of management cannot lead to a judgment on the existence of a conflict of interest, because this would result in the court making a judgment on the efficiency and general business soundness of the decisions of the management of the legal person.

3. Cause of the conflict of interest and risks

The cause of the conflict of interest between the managers of a legal person and the legal person itself stems from the fact that these persons (the managers) are called upon to manage foreign affairs, i.e. they are entrusted with the administration and management of the legal person. However, these persons are still also the bearers of their own, personal interests, in addition to exercising their responsibilities as directors and promoting the interests of the legal person.

The above conflict situation poses the following serious risk; it undermines the independence and integrity of persons who, while they (ought to) know or may perceive that their interests are in conflict with the interests of the legal person they manage (Marinos, CJEU 2017, 1167 et seq.), are called upon to take decisions of an administrative and management nature on behalf of the legal person whose interests are involved in the particular case. Therefore, those managing the legal person risk facing a 'moral dilemma' and may indeed neglect the interests of the legal person or even damage the property of the legal person in order to benefit themselves. It should be noted that the existence of a conflict of interests does not require that the specific conduct of the manager cause or result in damage, but only the possibility of an abstract damage in view of a specific decision or action.

4. Categories and characteristics of conflict of interest

The conflict of interest may be universal (referring to all the interests or members of the management body) or partial (referring to certain interests of a member or only certain members of the management body), permanent (in the context of a chronic relationship - e.g. development of a competitive activity, existence of a parallel creditor-debtor relationship between the management member and the legal person) or temporary (concerning a single transaction - e.g. approval of a temporary fee, sale of an asset), existing or potential (on the basis of the normal course of events, it is likely to occur), substantial or remote (judgement as to whether the benefit the director expects to obtain is of such intensity that it is of such a nature that it is likely to occur), such as to influence his or her independent judgment in handling the affairs of the legal person to the detriment of the interests of the legal person), and apparent (the divergence of interests is apparent, but not serious and real - see also (e.g. a prohibited transaction between the company and a member of its management body, which nevertheless serves the company's interests).

5. Appointment of an interim administration - purpose, powers of its members and termination of its term of office

According to Article 69 CC, in the case of a conflict of interest, as described above, anyone who has a legitimate interest (e.g. shareholder, member of the management, third party) is entitled, upon submission of a relevant application before the Single-Member Court of First Instance of the region where the company has its registered office, to cause the judicial appointment of a temporary management of the legal person, which is carried out by the procedure of voluntary jurisdiction according to Article 786 CCP. In this case, it is even argued that it is mandatory to summon the members of the administration of the legal person to attend the hearing, even if there is no court order to that effect (see Cf. Cf. 6998/2002).

The purpose of the provision of Article 69 CC is to diagnose the fictitious non-existence of the administration, due to the conflict of interests of the directors with the interests of the legal person, without, however, disregarding the autonomy of the will of the competent body of the legal person for the election of the directors, and therefore it is exceptionally applicable. Consequently, the appointment of an interim administration on the basis of a conflict of interest is only permitted for specific acts, decisions or cases and not a priori, on the basis of a conflict of interest that could hypothetically arise. This provision is, in fact, called for in the event that no other appropriate solution is proposed either by law or by the company's articles of association (see, for example, Article 97(1)(b) of the EC Treaty). 3 of Law No. 4548/2018, according to which in the event of a conflict of interests between members of the Board of Directors and those of the company and, as a result, the inability of the Board of Directors to make a decision on the relevant issues, the remaining members who do not face a conflict of interests, regardless of their number, must convene a General Meeting in order to make a specific decision on the issue).

The court decision, by which the provisional administration is appointed, in principle, also determines its more specific powers, otherwise (in case the powers are not determined by the aforementioned decision) it has all the powers of the regular administrative body, in accordance with the provisions of the law and the statutes of the legal person. In particular, in the case of the appointment of an interim management body on the grounds of a conflict of interests, the powers of the interim management body are normally limited by the court decision appointing it to taking a specific decision or dealing with a specific case in view of which the conflict arose. Consequently, in this case, the same legal person is often managed by two different administrative bodies, but with distinct powers: on the one hand, the ordinary (elected) administrative body, which continues to exercise the general administration and management of the legal person in accordance with the law and the statutes, and on the other hand, the provisional (court-appointed) administrative body, which performs only the tasks connected with the decision or case for which it has been appointed by the competent court. It should be noted that the judicially appointed administrative organ has a right to be informed by the regular administrative organ.

Finally, the term of office of the interim administration shall end automatically as soon as the reason for its appointment ceases to exist. In this case, it ceases when the reason for the conflict of interest ceases to exist (e.g. the cessation by the member of the management body of an activity competing with the legal person). In any case, the competent body of the legal person retains the right to elect a new management in accordance with the provisions of the law and the statutes.

6. Case law - Indicative case law

Α. Cases where a conflict of interest was found to exist

- Thessaloniki Court of Appeal 2056/2019: A conflict of interest arises due to criminal proceedings between the company and the members of the Board of Directors, since the managing persons have the same interest in the conduct of the proceedings, contrary to the legal person they represent and for which they are prevented from exercising their duties. The new interim management shall be charged exclusively with representing the legal person in the pending criminal proceedings.

- Thessaloniki Multi-Member Court of First Instance 2229/2019: Conflict of interests due to the coincidence in the same person of the status of the plaintiff shareholder and the legal representative of the defendant company in proceedings for the dissolution of the company by court decision at the request of a shareholder or shareholders representing 1/3 of the paid-up share capital, due to the existence of an important reason which, in an obvious and permanent manner, makes the continuation of the company impossible.

- Thessaloniki Single-Member Court of First Instance 4345/2019: Existence of a double conflict of interests in a case of a lawsuit for the recognition of the invalidity of decisions of the General Meeting and the Board of Directors of a limited liability company. Furthermore, the chairman and managing director, to whom, as a substitute body, the legal representation of the company was entrusted, was related to the plaintiffs-members of the (court-appointed) board of directors by a family relationship (a case of indirect - hidden conflict of interest).

- Thessaloniki Court of First Instance 2726/2017 held that there is a conflict of interest in the conduct of proceedings for the recognition of the invalidity of a decision of the General Meeting of the company, when the action is brought by a member of the Board of Directors, who at the same time has the status of a substitute body with the power of judicial representation of the company (in essence, the plaintiff is at the same time the representative of the defendant).

- SC 538/1998: There is a conflict of interests in the case of a permanent disagreement and malice of the managers of an S.P.A., which manifests itself in the form of "sterile refusal" and "continuous, permanent and insurmountable disagreements" (in essence, inactivity and general refusal to perform the duties of management).

Β. Cases where no conflict of interest was found not to exist

- Aegean Court of Appeal 84/2020: There is no conflict of interest where the actions of the management of the company are contrary to the individual interests of the shareholders or their views on the promotion of the company's objectives or the refusal to be accountable for the company's affairs.

- Piraeus Court of First Instance 1180/2018:held that there is no conflict of interest (nor breach of the duty of loyalty of the directors) when the management of a shipping company has a difference of opinion with respect to the shareholders' meeting as to the means of pursuing a business objective or differences as to the expediency of a business action.

- Vasilika Magistrate's Court 14/2014: did not accept the application of Article 69 CC in the case of a request by a board member for the appointment of an interim management of a joint stock company due to a conflict of interest to conduct a lawsuit involving a corporate action against the board member of the joint stock company, because the appointment of special representatives to conduct the lawsuit is provided for in para. 3 of article 22b of article 2190/1920 (now 104-105 of Law 4548/2018) and because the provision of article 69 of the CC 69 is exceptionally applicable, because the appointment of a temporary administration by the court affects the constitutionally guaranteed principle of self-government of the legal person.

- SC 765/2005: Implicitly accepts that the fact that the same persons are involved in the management of the member companies of a group does not in itself constitute a conflict of interests, even if in a specific case the interests of the controlling company are favoured, since the managers are motivated by different business views and priorities.

- Thessaloniki Court of Appeal 91/9/2004: there is no conflict of interest in the form of competitive acts by the managing persons, in the case of mismanagement of the company's affairs or when, in the case of a public limited company, In the case of the mismanagement of the company's affairs, in the case of a company, minority shareholders attribute to the members of the board of directors a violation of the law or mismanagement of finances or refusal to take an action or to answer individually to them, or where there is a conflict of interest between the shareholders, or in the case of disputes that have arisen between them.

7. Instead of an epilogue

In conclusion, in the case of the appointment of an interim administration due to a conflict of interests (CC 69), the court is called upon to delimit and address in a regulatory manner a situation where the administration of the legal person, although existing and functioning, is unable in substance to perform properly the functions entrusted to it because the personal interests of one or more of its members, in relation to one or more matters, conflict with the interests of the legal person which they are called upon to manage.