CEO had to pay while the board of directors was free to go

Roskilde Bank operated as a financial institution until 2008. After that, the business transferred to a company that merged with a public company to ensure financial stability in Denmark. The following year, the bank went bankrupt.

In 2006 and 2007, four of the bank's largest customers received different loans to buy shares in the bank. The bank had not conducted any credit rating before granting the loans. The bank considered the sale of the shares necessary because the Danish Financial Supervisory Authority required an increase in the bank's liquidity. Consequently, the bank chose to grant the loans.

No credit ratings took place before granting the loans because the CEO decided that the bank should approach its largest customers with an offer to loan the money to buy shares in the bank without making that assessment. The board of directors only approved the loans after the pay-out.

One of the questions in the case was, therefore, if the CEO and the board of directors could be held liable for not conducting credit ratings of the customers beforehand.

Negligence costs

The Danish Supreme Court found that the CEO was liable and had to pay more than DKK 200 million in damages.

Granting the loans without conducting a credit rating was negligent. The bank would not have granted the loans if the CEO had decided to conduct the credit ratings first. Therefore, the CEO had to expect that the payout of the loans was solely due to his decision.

The bank had suffered a financial loss. Customers received the shares without paying the loans. Therefore, the bank could just as well have sold the loans on the market to at least the same price at the time. The fact that the shares lost any value due to the bankruptcy did not play any role.

The members of the board of directors were unaware that the loans had been granted without any credit rating. They had also approved the loans based on a credit recommendation issued by the bank's management. The credit recommendation included a description of the purpose of the loan and the financial circumstances relating to the customers. On that basis, the board of directors was not responsible.

IUNO’s opinion

This case is special because it concerns a bank during the financial crisis. It highlights that CEOs can become liable and at risk of paying large sums if risky business decisions are made to the detriment of the business. 

IUNO recommends ensuring transparent cooperation at management level. One way of doing this may be by securing attention to clear guidelines for larger managerial decisions. That is especially important when the decisions involve a substantial risk in that industry. 

[The Danish Supreme Court's decision in case 241/2017 of 1 December 2022]