Liability of Directors for Mistakes: When the Court Can Intervene in Business Decisions of Company Executives
The doctrinal basis of officials' liability, which goes beyond mere formal compliance with the law or charter, consists of fiduciary duties and the "business judgment rule." Since the Supreme Court actively uses sources of "soft law," primarily the OECD Principles of Corporate Governance and international corporate governance standards, these concepts deserve special attention. They increasingly serve as criteria by which the court assesses the complexity of managerial decisions, the limits of permissible entrepreneurial risk, and the good faith behavior of officials.
The application of the Supreme Court of the "business judgment rule," the use of the OECD Principles of Corporate Governance as a source of "soft law," and their influence on the formation of modern standards of proper conduct of officials were explained by the Analytical and Legal Work Department of the Supreme Court’s Analytical and Legal Work Department:
"Thus, in the ruling of the Cassation Economic Court within the Supreme Court dated 21.07.2021 in case No. 910/12930/18, the panel of judges agreed with the complainant’s arguments that acts of a recommendatory nature may be applied by courts when assessing the actions or inactions of defendants. The court noted that in the banking sector, such documents include not only Methodological Recommendations but also the OECD Principles of Corporate Governance, adopted by the OECD Council in 1999 and already applied by the Supreme Court’s Grand Chamber in the ruling dated 25.05.2021 in case No. 910/11027/18.
The OECD Principles of Corporate Governance define the key fiduciary duties of directors. First and foremost is the duty of care – to act in good faith in the interests of the enterprise’s development, dedicating sufficient time, effort, and professional skills to its management. The second is the duty of loyalty, which requires avoiding conflicts of interest and making decisions solely in the interests of the company.
A distinctive feature of these international standards is that they operate on the "comply or explain" principle. In other words, if an official’s behavior deviates from the recommended practice, they must explain to the court the reasons for such deviation. In the absence of a convincing explanation, such deviation may be regarded as a breach of fiduciary duties.
Therefore, when deciding whether executives acted in the best interests of the bank, the court must consider not only the provisions of laws and subordinate regulations but also sources of "soft law" – international recommendations, summaries of best practices, business customs, etc.
The further development of this approach is traced in the Supreme Court’s Commercial Cassation Chamber ruling dated 20.11.2025 in case No. 910/8222/20. The court drew attention to the doctrinal approach according to which the interpretation of fiduciary duties is carried out through a mechanism of dual control: ex ante – by defining standards of proper conduct of officials through flexibly formulated fiduciary duties, and ex post – when the court assesses whether these duties were properly fulfilled in a specific situation.
At the same time, in the ruling dated 29.05.2024 in case No. 910/15260/18, the Supreme Court paid special attention to the "business judgment rule," which has developed in global corporate doctrine and judicial practice. As a general rule, courts should not hold directors liable for business decisions simply because they later turned out to be unsuccessful. Unless proven otherwise, it is presumed that directors acted based on sufficient information, in good faith, and in the interests of the company.
However, this rule is not absolute. It does not protect obviously unreasonable or absurd decisions that lack proper justification. This conclusion was set out in the Supreme Court’s Cassation Economic Court ruling dated 10.01.2024 in case No. 911/266/22.
Notably, in 2023, the "business judgment rule" was officially enshrined in the new edition of the G20/OECD Principles of Corporate Governance. Subprinciple V.A.1 provides that board members and management should be protected from litigation if decisions are made in good faith and with due procedural care.
Thus, the "business judgment rule" stipulates that an official must act: first, in the interests of the company; second, in good faith and without personal interest; third, with due care, making balanced and informed decisions. Therefore, this rule protects only those executives who are not in a conflict of interest and act solely in the company’s interests.
At the same time, judicial control is not excluded. The court may review managerial decisions when circumstances indicate that the official breached their duties, including bad faith, negligence, breach of fiduciary duties, or making decisions without proper informational basis.
In corporate law theory, three key components are traditionally distinguished for applying the "business judgment rule":
- The official must gather and analyze all necessary information to make a decision;
- The decision must be made in the absence of a conflict of interest;
- The decision itself must be rational and not appear obviously unreasonable or absurd from the standpoint of another reasonable person acting under similar circumstances with the relevant information.
The Supreme Court also draws attention to another important aspect: the inability of an official to explain the motives of decisions that caused losses to the enterprise may itself indicate bad faith behavior. A similar conclusion is contained in the Supreme Court’s Grand Chamber ruling dated 26.11.2019 in case No. 910/20261/16.
Therefore, courts must ascertain not only whether executives' actions correspond to the company’s interests but also whether they proved the economic feasibility and justification of their decisions and whether they did not exceed reasonable entrepreneurial risk.
At the same time, fault in such disputes is understood as the failure of the official to take all proper measures to prevent harm. Therefore, defendants must prove the absence of their fault by confirming that they acted in good faith, reasonably, and took all possible measures to prevent negative consequences.
As noted by the Supreme Court’s Cassation Economic Court in the ruling dated 10.04.2025 in case No. 910/3782/21, if the plaintiff refutes the presumption of proper performance of duties by the official on at least one criterion, this indicates improper fulfillment of fiduciary duties. In such a case, the defendant must prove that they acted in the company’s interests.
Analysis of the Supreme Court’s practice allows concluding that OECD international standards, primarily the Principles of Corporate Governance, today play a fundamental role in shaping approaches to resolving disputes about officials' liability. Their significance is manifested in several key aspects.
- Doctrinal basis of fiduciary duties.
The Supreme Court uses the OECD Principles to disclose the content of directors' fiduciary duties, which go far beyond formal compliance with job instructions. Based on them, the duty of care and the duty of loyalty are specified as basic standards of official conduct.
- Legitimization of the "business judgment rule."
OECD standards serve as the basis for justifying why courts should not assess business decisions based on their commercial success after implementation. Judicial intervention is justified only when decisions are obviously unreasonable, unjustified, or absurd.
- Source of "soft law" and the "comply or explain" principle.
The Supreme Court considers the OECD Principles as a source of "soft law" that helps assess the propriety of a manager’s behavior. If an official deviates from recommended international standards, they must justify the reasons for such deviation. Lack of explanation may indicate a breach of fiduciary duties.
- Criterion for assessing good faith and reasonableness.
OECD standards help the court apply Article 92 of the Civil Code of Ukraine, evaluating not only the formal side (compliance with the charter) but also the quality of management activities. This allows the court to establish unlawfulness even when a director has not formally violated the law but acted unreasonably or in their own interests.
Thus, OECD international standards have become for the Supreme Court not just a guideline but an effective tool for interpreting evaluative categories such as "good faith" and "reasonableness." They form the modern benchmark of proper conduct of officials in corporate legal relations and increasingly influence the development of Ukrainian judicial practice in corporate governance."
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