The Content of the Duty of Care in the Entrepreneurs Law
The Law of Georgia on Entrepreneurs imposes on the managerial person of an entrepreneurial society duties of a special, fiduciary character. Under the first part of Article 50, the managerial person must direct the affairs of the society lawfully and with the diligence of a fair and conscientious manager — caring for it as an ordinary, prudent person would care under analogous conditions, with the belief that the action is economically most favorable to the society. This formulation unites three components: lawfulness, an objective standard of care, and the priority of the society's economic benefit.
Where the duty is breached, the managerial person answers to the society for damage caused by the culpable non-performance of the duty of good faith. The law draws an important boundary here: neither the charter nor a decision of the partners may limit the managerial person's liability for the intentional non-performance of this duty — protection against intentional harm cannot be secured either by the charter or by a resolution of the meeting.
When the Managerial Person Is Released From Liability
The law defines two significant exceptions. First, a managerial person is released from liability if, by the action, the person was executing a decision of the general meeting. That release does not operate, however, where the managerial person facilitated the adoption of the decision by providing incorrect information, or knew that the decision would cause damage and failed to notify the meeting before its adoption or execution.
Second, the freedom of entrepreneurial decision regulated by Article 52. The duty of care is not breached, and the managerial person is not obliged to compensate the damage caused to the society by an entrepreneurial decision taken, if the person could reasonably be assumed to have taken the decision on the basis of sufficient and reliable information, proceeding from the interests of the society, independently and free of a conflict of interest or the influence of others. Under this rule, a commercial error made in good faith generates no liability — but the protection does not extend to a decision adopted in breach of duties provided by law or the charter.
The Special Situation: Insolvency
Article 51 tightens the duty of care in a situation of insolvency: if the society is insolvent or faces the threat of insolvency, the managerial person must, without culpable delay and no later than 3 weeks from the moment insolvency arose, declare insolvency under the procedure established by the Law of Georgia on Rehabilitation and Collective Satisfaction of Creditors. At that point the attention of the managerial person is no longer directed to the society's owners alone — in a situation where the society's assets in effect serve the creditors, the deepening of damage is a function of that person's decisions. The declaration is not culpably delayed if the managerial person duly performs the duty of care.
The Non-Compete Prohibition and the Taking of Corporate Opportunities
Article 53 forbids the managerial person, without the consent of the society, to carry on the same activity the society carries on, or to be a managerial person of another society operating in the same field. By the employment contract, this obligation may survive dismissal from the position, but for no more than 3 years. A compensation may be provided for the prohibition, its amount and payment determined by the employment contract or an additional agreement of the parties. On breach, the society may demand from the violator, together with compensation for the damage, payment of the agreed penalty, or, instead of compensation, the transfer to the society of the benefit received from a transaction concluded in the person's own name or that of a third person, or the cession of the right to receive such benefit.
Article 54 prohibits the taking of corporate opportunities: the managerial person may not, without the prior consent of the society, use for personal benefit or for the benefit of persons other than the society a business opportunity connected with the field of the society's activity which became available in the performance of the duty or by virtue of the position, and which, from a reasonable point of view, could have been the object of the society's interest. Prior consent is not needed if the general meeting or the supervisory board has already deliberated on the opportunity and declined to use it. The obligation survives for no more than 3 years after dismissal, and the employment contract may set an even shorter term. On breach, the society demands compensation for the damage — including lost income — or the transfer of the benefit received.
Consent under both prohibitions is granted, in a general or commandite partnership, by the general meeting, and in a limited liability company, a joint stock company or a cooperative — by the organ that appoints the managerial person. Consent may be given both in general and with respect to a particular activity, transaction type or participation in an entrepreneurial society; an unsubstantiated refusal to grant it is impermissible. In the case of the non-compete, consent is deemed given if, at the appointment of the managerial person, the partners knew of the same activity being carried on and did not demand its cessation.
High-Value Transactions and Control
A practical manifestation of the duty of care is the control of high-value transactions: if the value of a transaction exceeds 50 percent of the balance-sheet value of the society's assets or the smaller amount provided by the charter, the transaction must be approved by the general meeting. This norm does not release the managerial person from liability — it merely establishes that a transaction of such scale falls under the meeting's control, and its bypassing may itself be assessed as a breach of the duty of care.
Frequently Asked Questions
What does the diligence of a fair and conscientious manager mean?
It is an objective standard of care: the managerial person must care for the society as an ordinary, prudent person would be expected to act under analogous conditions, believing the decision to be economically most favorable to the society.
Does the law protect commercial error?
Yes — under the freedom-of-decision rule, damage is not compensated if the person could reasonably be assumed to have decided on sufficient and reliable information, in the society's interests, independently and free of conflicts. The protection does not extend to decisions adopted in breach of law or the charter.
How long does the non-compete survive after dismissal?
By the employment contract it may survive dismissal, but for no more than 3 years; the prohibition on taking corporate opportunities likewise remains in force for no more than 3 years after dismissal.
Can liability be excluded in advance?
Not for intentional breach. Neither the charter nor a decision of the partners may limit the managerial person's liability for the intentional non-performance of the duty.
How We Help on Legal.ge
The attorneys at Legal.ge represent both sides in disputes involving managerial persons and entrepreneurial societies: we assess the performance of the duty of care against the standards of Articles 50-54, evaluate the prospects of the freedom-of-decision defense, and prepare both damage-compensation and defense positions.
If you serve as a managerial person and face allegations of a breach of duty, or your society has suffered damage from a manager, contact us at Legal.ge — we will assess the case on the basis of the exact norms of the law.