The political debate concerning breach of trust under Section 153 of the Criminal Code is entering the next round. The question of whether the legislature will heed the Austrian business world's call for urgent reform could be answered towards the end of this year.
Breach of trust under the Criminal Code
Section 153 of the Criminal Code states:
"Whoever knowingly abuses the authority conferred to him by statute, official order, law or contract to dispose of property not belonging to him or to oblige this other person and causes damage to another person in this way, shall be criminally liable."
In practice, a high degree of uncertainty regarding the interpretation of the offence prevails, and the most recent Supreme Court convictions resulted in criticism of the extensive scope of its definition. A working group was appointed by the Ministry of Justice in February 2013 to scrutinise the definition under the code. Ultimately, the majority of the working group identified a problem not at the level of the law, but rather "in the practical application of the provision", and thus rejected any amendment of the provision in its report.
Commentators have strongly criticised the most recent draft of the Criminal Law Amendment Act 2015 for including no new provisions on breach of trust. Moreover, a parliamentary motion has been tabled demanding a comprehensive reformulation of the elements of the offence. This motion focuses on a specification of the terms 'misuse' and 'damage caused by embezzlement', and aims at preventing the a priori criminalisation of bad economic decisions.
Pursuant to Supreme Court case law, embezzlement under Section 153(1) of the Criminal Code means any conduct prejudicial to the interests of the represented parties when exercising the power of attorney, since management must be geared towards the greatest possible benefit for the principal. Consequently, when assessing the individual transactions concluded for those represented, their positive and negative effects must be taken into account equally. Beyond explicit legal obligations, case law has recently leaned toward assuming a misuse of power, even in cases of economically unjustifiable actions with no evidence of bad faith – to the disadvantage of the holder of power.
For this reason, the parliamentary motion proposes to introduce a specification that any infringement by the holder of power of attorney should be a criminal offence only if such infringement takes place in an "unacceptable manner". Under the proposed motion, the use of legal power by the holder of power would be considered "unacceptable" only if it lies "beyond what is reasonably justifiable". The relevant "internal rules" for the decisions of the holder of power of attorney would set the boundaries for his or her actions and omissions. Where the holder of power of attorney is granted discretionary scope, he or she would transgress the boundaries if his or her decision lies "beyond any reasonable exercise of discretion" in the form of a "misuse of power". The obligation by the holder of the power of attorney to protect the interests of the principal in the best possible manner would continue to apply, but may not put gain maximisation above the principal's long-term interests.
These proposals may be geared towards those economic decisions that have a positive impact on the principal's interests in the long term but entail the initial risk of losses. So far, Supreme Court case law has not dealt specifically with this phenomenon. There can be no misuse of power where a decision by the holder of power of attorney is based on an overall economic plan that takes risks into account and is willing to accept initial losses so as to avoid a potential (greater) loss in the future; or compensate losses from a future transaction with profits from the follow-up transaction. Such approach must be regarded as a set of closely interrelated business actions which can be economically balanced, and should not be punishable on the grounds of embezzlement.
In addition, the motion proposes that the approval of the principal through the "economic beneficiary (i.e. of the shareholders)" should rule out an abuse of power. This is reference to the Libro decision, which attracted strong criticism from the business world. The draft does not mention whether subsequent approval will exempt a party from prosecution – a notion that literature on the issue has so far rejected.
At the same time, the parliamentary motion aims at incorporating the business judgement rule into Section 84 of the Stock Corporation Act and Section 25 of the Act on Companies with Limited Liability:
"[a board member or managing director] by all means acts with the diligence of a prudent and conscientious manager when he is not guided by extraneous interests in his business decisions and may assume on the basis of reasonable information that he is acting in the interest of the company."
The Supreme Court, however, is critical of the proposals in the motion because it does not see any need for adjustment. It remains to be seen which arguments will weigh most heavily for the legislature.
For further information on this topic please contact Heidemarie Paulitsch at Schoenherr by telephone (+43 1 53 43 70) or email ([email protected]). The Schoenherr website can be accessed at www.schoenherr.eu.
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