Voluntary committee members acquitted of directors' liability in connection with the bankruptcy of a sports club

Date 25 nov. 2010

 

On 18 August 2010, the Eastern High Court gave judgment in favour of  nine voluntary and unpaid committee members of a sports club in a case concerning the possible extension of their liability as such pursuant to the work that they had conducted prior to the club’s bankruptcy.

 

In its decision, the High Court did not find that the committee members, ought to have realised that there were no financial basis for continuing the running of an elitist sports division in the subsequent season considering the club’s financial situation at the time. On that basis, the nine committee members were acquitted of liability.

 

The case in brief

Following several years with deficit and a negative equity, the handball association of Virum-Sorgenfri Håndboldklub (herinafter ”VSH”), in 1999, initiated a partnership with the local football club, Lyngby Boldklub, with the purpose of establishing an elitist handball division. On that basis, the company VSH Vikings A/S was established. As neither the sporting nor the economic results developed as expected, the Central Tax Administration declared the company bankrupt in 2001.

 

At board meetings throughout the late summer that same year, the committee members of VSH decided to revive the idea of an elitist handball division and in that connection, the club was given back the elitist part of the bankruptcy estate.

 

Subsequently, VSH applied to the local council for a sponsorship and, on 19 November 2001, they were awarded DKK 800,000 to be paid in instalments during 2001 and 2002. Furthermore, the committee budgeted for an additional DKK 400,000 of new sponsorships for the season of 2001/02.

 

Subsequently, the chairman of the board at the time and a board member entered into a number of player contracts on behalf of VSH, dated 24 November and 5 December, respectively, just as the association concluded two two-year coach contracts dated 29 January and 21 March 2002.

 

Based on a number of cash flow statements drafted during spring of 2002, the committee realised that the association was likely to encounter liquidity problems. As a result of this and with a view to raising further sponsorship contracts, the committee employed a sporting director (hereinafter “the Sporting Director”) on 1 April 2002, however, without formalising the terms of employment. In May 2002, the Sporting Director contracted with several new players on behalf of VSH, before retiring from his activities in June. The board had lost confidence in him since he had failed to obtain new sponsorship agreements. At the same time, VSH realised that the local council had not disbursed the instalment of 1 June 2002 amounting to DKK 200,000.

 

As the following financial statement for the period from 1 April 2001 to 31 March 2002 – which was available on 13 June 2002 – showed an operating loss and a negative equity, VSH was declared bankrupt on 26 July 2002.

 

The legal basis

The board of directors has the overall responsibility for the running of a business or an association and as a result hereof, may be assigned liability for damages pursuant to the standard principles of Danish law of torts.

 

No rule of law exists which in general or beforehand prescribes when committee members have acted actionable and thus risk being assigned liability. In practice, this will therefore be determined by the Danish courts whose assessment hereof will be based on how a normal, reasonable and responsible committee member would have acted in a similar situation and with similar knowledge.

 

The City Court’s judgment

The liquidator claimed that the voluntary committee members should be held liable for damages as they had contracted with both handball coaches and players for the subsequent season (2002/03) during winter 2001 and spring 2002.

 

The City Court found that the board members in VHS had incurred liability by contracting with the two coaches for the following season

 

However, the committee members were acquitted of liability in connection with the player contracts. Contrary to the coach contracts, these were not signed in accordance with the club’s articles of association and they were all considered void.

 

The decision of the City Court was appealed by the nine committee members.

 

The decision of the High Court

Before the High Court, only the assessment of whether the committee had incurred liability by contracting with the two coaches was in question. The fundamental question related hereto was if the committee members, at the time when the contracts were entered into, realised or should have realised that there was no economic basis for continuing the running of the elitist handball division for the following season.

 

In its assessment, the High Court emphasised, that the committee members’ decisions were made in the board of a normal sports association, as well as the job performed by the committee members was conducted on an unpaid and voluntary basis and without a commercial object. Furthermore, the court found that voluntary work is desirable from a general social perspective.

 

However, the court also emphasised that the association ran an elitist handball club with professional athletes and with a certain budget, which necessitated that general corporate and commercial considerations were taken into account when the decisions were made.

 

The High Court found that there is generally a correlation between players and coaches, sporting achievements and sponsorship revenue in a professional sports association. The court also found that it is not unusual that only a small part of the budgeted sponsorship income is measurable through binding agreements at the time when it is necessary to have the disposal of players and coaches for the upcoming season. In the High Court’s opinion, clubs in the sporting business in general must be granted a certain freedom to make arrangements for the recruitment of players and coaches despite uncertainty about future sponsorship revenue.

 

As regards the employment of the first coach on 29 January 2002, the court held that the actions of the board of VSH were normal and necessarry – despite the previous years of significant deficits in the club –since the lack of sponsorship could rightly be expected to be earned during the remaining part of the season in the league.

 

Up until the appointment of the second coach on 21 March 2002, the economic situation of the club had changed for the worse according to cash flow statements, partly because the local council had failed to pay the third instalment of DKK 200,000 of their sponsorship. However, with the appointment of the Sporting Director, the board had a legitimate expectation of raising more sponsorship money and therefore, the High Court did not consider it actionable that the board had signed this agreement.

 

Thus, the High Court concluded that there was no reason to impose a liability on the committee members. The City Court's ruling was overturned and the nine members were all acquitted.

 

Consequences of the decision

To a great extent, sport in Denmark is based on volunteerism why the judgment of the City Court caused a general concern amongst the volunteers in the sporting community in Denmark. A natural consequence could have been that the volunteers would withdraw from their involvement in association activities because of the risk of becoming personally liable for the association’s dispositions.

 

However, the decision of the Eastern High Court shows specific consideration to the fact that the job performed by the committee members in the sports club was conducted on an unpaid and voluntary basis, and that voluntary work in general is desirable from a social perspective. On these grounds, the court made it clear that only exceptionally irresponsible behaviour will result in personal liability for voluntary committee members in sports clubs for the economic dispositions they make.

 

 

If you have any questions or require additional information on the judgment contact Claus Molbech Bendtsen, Attorney (cmb@mwblaw.dk) or Pernille Nørkær, Attorney (pno@mwblaw.dk).

 

The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions of considerations.