Legal guide for company directors and CEOs in Albania

BREAKING: Coronavirus (COVID-19) considerations for directors

1. What are the key issues for directors during the COVID-19 crisis?

Directors’ main duties during the COVID-19 crisis are related to taking the necessary action as instructed by the competent authorities. The key issues concern the safety of company employees, proper hygiene in the workplace, addressing the financial sustainability of the company and taking the required measures to reopen business activity by implementing all COVID-19 protocols in force.

Certain business activities are explicitly listed as being under the obligation of quarantine and a complete shutdown of operations. Any breach of such obligation would trigger directors’ personal liability. Those activities which are permitted require a director to obtain in advance the relevant authorisation to operate. Further, the director should notify the State Health Inspectorate, Institute of Public Health, State Labour Inspectorate and the Local Health Care Unit that the company is operating.

Due to the financial constraints the business is facing during COVID-19, directors have the obligation to use the financial aid provided by the government in lessening the impact of the crisis, to pay the company’s employees the salary support provided by the state budget and to maintain the solvency of the company as long as possible.

The directors face logistical and financial issues in implementing COVID-19 protocols on social distancing in the workplace, which in many instances require significant changes to the work environment. In addition, the directors are responsible for due implementation of COVID-19 hygienic-sanitary measures on the company’s premises.

2. What government relief measures have been made available to directors?

Directors need to be aware of the measures that have been announced by government authorities to assist companies through the crisis, and determine which ones are relevant to the company.

The most relevant measures for companies include:

  • delay of up to 3 months in paying the instalments of loans provided by licensed financial institutions
  • exemption from paying income tax instalments for 2020 for companies with a turnover of up to ALL 14 million
  • exemption from paying income tax instalments for 2020 for companies subject to simplified income tax
  • deferment of income tax instalments during the period April – September 2021 for companies with a turnover of over ALL 14 million, with the exception of banking, telecommunication, pharmaceutical and food products companies
  • deferment of submission of individual income tax declaration for 2019 and the payment of any tax liability from 30 April 2020 to 31 July 2020
  • exemption from paying the local tax on infrastructure impact for investments made for purposes of reconstruction due to the consequences of natural disasters
  • salary support from the state budget for various categories of directors and employees.

3. What changes have been made to directors’ duties as a consequence of the COVID-19 crisis?

No particular and explicit changes have been made to directors’ duties apart from the responsibility to implement the COVID-19 protocols.

Directors duties and responsibilities

This guide focuses on the rules relating to limited liability companies (LLCs). It does not address the rules applicable to other forms of entities, such as joint stock companies, simple partnerships, etc. However, rules for LLCs and joint stock companies are similar in many respects.

1. What form does the board of directors take?

In Albania, limited liability companies are run by 1 or more directors, acting jointly or separately, rather than by a management or supervisory board.

2. What is the role of non-executive or supervisory directors?

With regard to the LLC, Albanian law does not provide for a non-executive role or supervisory directors. However, the articles of association or other internal regulations may establish other types of management bodies, including non-executive or supervisory directors.

3. Who can be appointed as a director?

Only a natural person with full legal capacity can be appointed as a director. A director is not required to be a resident or a national of Albania. A director does not need to hold any shares in the company and is not usually regarded as having an employment relationship with the company.

There are some legal restrictions on who can become a director, in particular:

  • a director of the parent entity cannot be appointed as director of its subsidiary
  • a director may not act as director, hold any management position or be employed in another company operating in the same business sector unless it is approved by resolution of the shareholders’ meeting with a supermajority of votes
  • a person who has been convicted of financial and business-related crimes cannot be appointed as director for a period of 5 years.

4. How is a director appointed?

Directors are appointed and removed by a resolution of the shareholders’ meeting that is approved with a simple majority of the shareholders representing more than 30% of the shares in the company. Such majority cannot be changed by shareholders’ agreement or the company’s articles of association. The appointment period is limited to 5 years, which can be renewed. The appointment is effective upon adopting the relevant resolution. In practice, however, the appointed directors will only be able to prove their authority after being registered with the trade registry kept by the National Business Centre (NBC). The director’s personal data together with his/her specimen signature are filed with the NBC.

5. How is a director removed from office?

A director is always subject to removal at any time by resolution of the shareholders’ meeting without providing a reason for the removal. The removal of a director is subject to any entitlements the director may have arising from his/her relationship with the company based on an employment contract or a different type of contract. Since under Albanian law a director’s appointment is for a fixed term, their appointment will terminate automatically if not renewed. In practice, the company has the obligation to update its trade registry data by requesting the NBC to remove the director and appoint a replacement, if necessary. In addition, a director is automatically removed upon commencement of liquidation or bankruptcy procedures whereby a liquidator or bankruptcy administrator is appointed.

Apart from removal, a director may resign his/her office at any time by notice to the company and undergoing a particular procedure which enables the shareholders’ meeting to appoint a new director, if necessary. The resignation does not affect the company’s claims against the director for breach of duty of loyalty towards the company.

Any change in the director’s status must be registered with the NBC. Registration has a declaratory effect towards third parties.

6. What authority does a director have to represent the company?

According to company law, a director is the legal representative of a company. The director of an LLC holds full representation powers to commit and act on behalf of the company unless his/her powers are limited by resolution of the shareholders’ meeting or the articles of association. Such limitation of a director’s powers should be duly and timely registered with the NBC for declaratory purposes against third parties. In the event the company appoints more than one director, they are deemed to represent the company jointly unless otherwise provided for.

As regards third parties, a director has unlimited power to bind the company pursuant to the powers envisaged in his/her appointment documents and made public through the NBC electronic trade registry. A director remains liable towards the company for acting within the restrictive powers in relation to third parties. The mere registration of a director’s limited powers with the NBC is considered sufficient for third parties to acknowledge them. Under such circumstances, the company cannot be held liable towards the third party due to a director’s actions exceeding the representation powers granted to him/her. The director remains liable for damages against the third party.

7. How does the board operate in practice?

Albanian law does not provide for or regulate the board of directors as a governing body. However, the articles of association or other internal regulations may set out a board of directors and set forth the rules of operation. 

8. What contractual relationship does the director have with the company?

Appointment as a director does not of itself constitute a contract with the company. Company law envisages a director’s right to remuneration which should be appropriate and consistent with his/her duties and the company’s financial situation. Directors’ remuneration is decided on by the shareholders’ meeting. Conversely, if the company is facing financial difficulties, the assembly may resolve to reduce directors’ remuneration to the appropriate extent. It is not mandatory for a company to sign a service contract or employment contract with the director for his/her services. The director is deemed an employee of the company for social and health security contribution purposes.

9. What rules apply in respect of conflicts of interest?

Prevention and elimination of conflicts of interest falls within the scope of a director’s duty to act in the best interest of the company. Company law sets out restrictions on a director’s activities so as to prevent conflict of interest situations. Hence, the director is not allowed to conclude any agreement or conduct transactions with the company unless he/she declares in advance the terms and the nature of his/her interest and obtains the prior consent of all shareholders. The same limitations apply to agreements to be signed between the company and a third party having a personal or financial relationship with a director. Albanian law lists the persons who are legally presumed to be in relation with a director, as follows:

  1. the spouse, parents, siblings of the spouse
  2. children, parents, siblings, grandchildren or the spouse of any such persons
  3. relatives of second degree, adoptive parent or adopted child, or first-degree relatives of the spouse
  4. a person living with a director.

10. What other general duties does a director have?

Company law imposes a number of general statutory duties on directors, including inter alia:

  • carry out the everyday management of the company’s business activity and implement its trade policies set out by the shareholders’ meeting
  • represent the company towards third parties
  • ensure that all statutory filings with the NBC are duly carried out and the company’s accounts and documents are properly kept
  • prepare and sign the annual financial statements, the consolidated balance sheet and performance reports and, together with the proposals for distribution of profits, submit them to the shareholders’ meeting for approval
  • create a timely warning system for events that threaten the company’s business and solvency
  • report to the meeting regarding the implementation of trade policies and of other specific duties
  • perform other duties defined in law and the articles of association.

In addition to the above general duties, Albanian law imposes a duty of loyalty on directors. Directors are required to execute their duties specified in law and the articles of association in good faith and in the best interest of the company in its entirety. In performance of their duties, directors are liable to the company for every act or omission which is not reasonably connected to the objectives of the company. Directors are under the general obligation to treat all shareholders equally. The same duty of loyalty should also guide the director’s actions in avoiding conflicts of interest.

In addition to the duty of loyalty, company law also requires the director to exercise reasonable care, skill and diligence when performing his/her duties.

11. To whom does the director owe duties?

The director’s duties are owed to the company and to the shareholders alike. In practice, however, the company’s interests do not always coincide with those of the shareholders. Hence, a director’s actions should be mainly driven by the company’s best interests with the emphasis on corporate social responsibility and subsequently on shareholders as well.  

12. How do the director’s duties change if the company is in financial difficulties?

In circumstances of insolvency, director’s liability toward creditors may arise where directors have allowed the company to continue its commercial activity when they should have foreseen that the company lacked the margin capacity to fulfil its duties. Pursuant to Albanian law, a director has the obligation to convene a shareholders’ meeting in the event that according to the company’s financial statements or interim financial reports there is a risk that the company’s assets will not be sufficient to cover its liabilities within the next 3 months of operation.

13. What potential liabilities can a director incur?

As a general principle, directors will be held jointly and severally liable, with all their assets, if they perpetrate one or more of the following acts:

  • abuse of power and legal form of the company
  • treat company’s assets as if they were their own
  • if they knew or under the given circumstances should have known the margin incapacity of the company, they did not take the relevant measures necessary to ensure that the company, depending on the type of activity exercised, has sufficient capital in order to fulfil its duties and obligations owed to third parties.

In addition to the above, a director is liable for damages against the company if, contrary to law provisions, he/she carries out one of the following:

  • return contributions to shareholders
  • pay interest or dividends to shareholders
  • distribute the assets of the company
  • allow the company to continue its business activity despite the fact that based on its financial situation the company is unable to meet its obligations
  • grant loans.

The above actions are not deemed exhaustive.

Liability may also arise as a result of a breach of the duty of loyalty owed by directors to the company and the shareholders.

Directors found to have acted in breach of their duties and professional standards are liable for damage caused to the company as a result of their breach and are further required to transfer any personal profit which they or others connected to them have accrued from their misconduct. Where the breach was caused by more than one director, they will be held jointly liable. The burden of proof falls on directors to demonstrate that they performed their duties properly and in accordance with the requisite standards.

14. How can a director limit his/her liability?

A director cannot arrange to limit his/her liability such that it would relieve him/her from liability for damage caused to the company. Conversely, any such arrangement shall be deemed null and void. However, directors may be excused from liability if there are justified grounds for such exclusion, such as: the director acted in good faith and with due care, or based on a lawful decision of the shareholders’ meeting.

Mirko Daidone
Managing Partner
Tirana
Besnik Duraj
Local Partner
Tirana