Liability of Corporate Officers for Omission in Cases of Business Insolvency: Duty of Care and Duty to Preserve Corporate Assets

This article examines the liability of corporate officers for omissions in the performance of their duties when business insolvency is imminent or already established. Based on the duties of care, loyalty, and preservation of corporate interest set forth in the Brazilian Civil Code, the study explores the legal consequences of managerial inaction in the face of a company’s economic deterioration, including civil and criminal liability for willful or negligent omission. The article also analyzes case law on failures to adopt asset protection measures, to timely file for judicial reorganization, or to duly inform creditors.

Corporate officers play a central role in managing the affairs of a business entity and must act in accordance with principles of sound management, corporate interest, and preservation of the company. In the context of financial distress, this duty becomes even more critical, as omissions may worsen the company’s condition and harm creditors, employees, and other stakeholders.

This article proposes an analysis of directors’ liability not only for wrongful acts (e.g., fraud, deliberate mismanagement), but especially for unjustified omissions in the face of insolvency scenarios, focusing on the objective limits of the duty of care and the civil and criminal consequences of inaction.

2. Duty of Care of Corporate Officers under Brazilian Law

2.1 Legal Basis in the Civil Code

Article 1,011, §1 – "The officer must exercise, in the performance of their duties, the care and diligence that any active and honest person customarily employs in the management of their own affairs."

This provision establishes an objective duty of care, which includes:

·         Ongoing monitoring of the company’s financial health;

·         Implementation of measures to prevent insolvency;

·         Transparent communication with shareholders and creditors;

·     Seeking legal alternatives to preserve the company (e.g., judicial or out-of-court reorganization, debt restructuring).

Failure to take or undue delay in taking such measures may constitute gross negligence or reckless management.

3. Omission and the Establishment of Civil and Criminal Liability

3.1 Civil Liability

The omission of the officer may give rise to liability for damages when:

·         Reasonable steps to prevent the worsening of the crisis are not taken;

·         A false sense of normality is maintained while hidden liabilities accumulate;

·         The officer fails to inform shareholders and creditors about the insolvency status.

"An officer is liable when, in the face of evident insolvency, they fail to adopt appropriate legal measures, thereby increasing creditors’ exposure." (São Paulo Court of Appeals, Civil Appeal No. 1044520-39.2021.8.26.0100, judgment dated 08/15/2023)

3.2 Criminal Liability

Brazil’s Bankruptcy and Judicial Reorganization Law (Law No. 11,101/2005) provides for criminal sanctions for willful or negligent omission by officers:

Article 168, I – It constitutes a bankruptcy crime to fail to file for bankruptcy or judicial reorganization when the state of insolvency is evident, to the detriment of third parties.

Penalty: imprisonment from 2 to 6 years, plus a fine.

4. Duty to Preserve Corporate Assets and Mitigate Damages

Corporate officers are required to take effective steps to avoid further deterioration of the business, such as:

·         Renegotiating contracts with suppliers and creditors;

·         Suspending new hires or high-risk investments;

·         Timely initiating judicial or extrajudicial reorganization proceedings;

·         Proposing capital contributions, ownership restructuring, or the sale of non-core assets;

·         Winding down operations in an orderly fashion if continuity is no longer feasible.

Failure to meet these obligations may sever the relationship of trust between management and stakeholders, justifying the officer’s removal, disqualification from management roles, and personal liability.

5. Case Law on Managerial Omission in Business Crises

"An officer’s failure to timely disclose the company’s bankruptcy status, while maintaining a façade of normalcy, constitutes a breach of good faith and results in joint liability for debts incurred during that period." (STJ – Superior Court of Justice, REsp 1.812.501/SP, Reporting Justice Marco Aurélio Bellizze, judgment dated 09/12/2022)

"It is improper for an executive to remain inactive in the face of deteriorating cash flow, delaying legal action to the detriment of third parties." (Minas Gerais Court of Appeals, Civil Appeal No. 1.0024.18.320521-0/001, judgment dated 04/19/2023)

"Passive and negligent management in pre-insolvency situations constitutes mismanagement and may justify the piercing of the corporate veil." (São Paulo Court of Appeals, Civil Appeal No. 1038711-77.2020.8.26.0100, judgment dated 11/22/2022)

6. Best Practices for Corporate Officers in Times of Crisis

·         Regularly analyze financial and accounting indicators;

·         Seek professional advice on corporate restructuring and debt renegotiation;

·         Notify shareholders and co-managers about imminent risks;

·         Document decisions and justify the adopted alternatives;

·         Avoid assuming new obligations without realistic ability to fulfill them;

·         Timely assess the feasibility of judicial recovery or an orderly wind-down.

7. Final Considerations

Corporate officers may be held liable not only for acts of bad faith or intentional wrongdoing, but also for omissive conduct that, in the face of the company’s economic deterioration, reflects unjustified inaction and mismanagement.

Civil and bankruptcy law impose objective duties of care and asset preservation, the breach of which may lead to personal, financial, and even criminal liability.

A responsible and transparent approach to business insolvency is not only a legal obligation, but also an ethical duty for those entrusted with leadership in business organizations.