Supreme Court 2026:9 – Managing Director’s authority

Supreme Court 2026:9 – Managing Director’s authority

On 28 January 2026, the Supreme Court issued a precedent-setting ruling clarifying the interpretation of Chapter 6, Section 17 of the Finnish Limited Liability Companies Act regarding the division of authority between the managing director and the board of directors, particularly in financing and security arrangements. The decision is noteworthy because the court rejected a simplistic euro-based approach and emphasised the context of the legal transaction in relation to the company’s prior decisions as well as the economic nature of the arrangement.

Background of the case

The case concerned A Oyj, a limited liability company operating in the construction sector, which on 2 August 2018, had purchased shares of a housing company from X Oy for approximately 4.5 million euros. The shares entitled the holder to possession of four attic apartments under construction. Prior to the transaction, A Oyj had acted as the contractor for the attic apartments. Part of the purchase price remained as debt, and the shares were subsequently pledged to the seller as security for the remaining purchase price.

On 5 March 2019, the managing director of A Oyj took out a short-term loan of 3.7 million euros for the company from a bank and pledged the same shares of the housing company to the bank as security for the loan. The loan was used to pay the remaining purchase price to the seller. After the apartments were completed, the company sold the shares in the spring of 2019 for approximately 6.5 million euros and repaid the bank loan on 10 May 2019. The company was declared bankrupt on 24 January 2020.

The bankruptcy estate filed a claim in District Court seeking to set aside the payment of the debt to the bank pursuant to Section 10 of the Act on the Recovery of Assets to Bankruptcy Estates. The decisive ground for the claim was that the managing director had exceeded their competence and authority in taking out the loan and pledging the shares, meaning that the bank would not have had valid security and the payment would be recoverable as an unsecured payment.

The District Court upheld the bankruptcy estate’s claim. The Court of Appeal overturned the District Court’s judgment. The Supreme Court held that taking out the loan and providing the security fell within the scope of the managing director’s authority, and accordingly the managing director did not require authorization from the board of directors for those legal acts. The Supreme Court therefore upheld the judgment of the Court of Appeal.

Competence and authority – two different safeguards

The Limited Liability Companies Act distinguishes between competence and authority.

Competence concerns a representative’s right to act on behalf of the company in relation to third parties, and it is limited by the provisions of the Limited Liability Companies Act regarding the division of duties among corporate bodies as well as by the mandatory provisions of the law (Chapter 6, Section 28, Paragraph 1, Subparagraph 1 of the Limited Liability Companies Act).

Authority, on the other hand, concerns the internal division of labour within the company: whether the representative was authorized to make a decision without the board of directors’ authorisation. Exceeding the authority renders a legal transaction unenforceable only if the counterparty knew or should have known that the authority had been exceeded (Chapter 6, Section 28, Paragraph 1, Subparagraph 3 of the Limited Liability Companies Act).

In the case at hand, the question of competence was resolved straightforwardly. The managing director had the right, as stipulated in the articles of association, to represent the company alone; the legal transaction was not subject to a decision by the general meeting and did not violate the mandatory provisions of the Limited Liability Companies Act (Supreme Court 2026:9, paragraph 12). In its reasoning, the Supreme Court also emphasized that the general right of representation confers on the representative the same authority as the board of directors of a limited liability company (paragraph 10).

The actual legal assessment thus concerned the scope of authority.

Criteria for assessing authority – the model of comprehensive assessment

The core message of the Supreme Court’s decision can be summarized as follows. The starting point is that the managing director may decide alone on legal transactions related to the company’s ordinary business operations that do not have extensive effects. The following factors, at a minimum, may be taken into account in the assessment:

• the company’s internal practices and how the board of directors has defined the division of authority through its actions;
• the nature of the legal transaction;
• the magnitude of the financial interest and business risk associated with the legal transaction in relation to the nature and scope of the company’s operations;
• whether the legal transaction relates to decisions previously made by the company or whether it constitutes an entirely new business decision.

The list is neither hierarchical nor exhaustive; rather, the factors are weighed on a case-by-case basis. A significant change from previous rulings is that the connection between the legal transaction and prior decisions was made an explicit assessment criterion.

What remains of the euro-denominated threshold?

The Supreme Court did not argue that the euro-denominated amount is irrelevant. On the contrary, paragraph 22 of the decision explicitly states that a loan and security of 3.7 million euros must be considered significant in relation to the company’s turnover and assets, which supported the assessment that the transaction was unusual and extensive in nature. The company’s turnover was slightly over 5 million euros in the 2017 financial year and less than 13 million euros from 1 January 2018 to 30 June 2019.

The Supreme Court’s key ruling can be found in paragraph 23 of the decision: authority cannot be assessed solely by comparing the significance of the actions to the company’s revenue and other assets; rather, it is justified to take into account the overall arrangement implemented within the company. The amount in euros is therefore still a factor to be weighed, but it is not decisive if other factors point toward the transaction being in the ordinary course of business.

The Supreme Court relied in particular on the following elements in its overall assessment:

• The loan and the pledge were connected to a transaction made in August 2018, the binding nature of which was not even disputed.
• Failure to pay the final purchase price could have caused the company significant financial harm.
• An email sent by a member of the board of directors to the bank in November 2018 indicated that the board of directors was aware of the arrangement and that the financing need was part of a project to be completed.
• The shares provided as security were the company’s current assets and were already held by the bank as security for the seller’s loan.
• The loan and the pledge did not increase the company’s total debt or the amount of security.
• This involved short-term, temporary financing—in effect, a loan conversion.
• The loan terms were not out of the ordinary.

The Supreme Court concluded that taking out the loan and providing the security were practical measures required for the payment of the final purchase price and the resale of the shares.

The decision in light of previous case law

The Supreme Court distinguished this case from its previous decisions in which the representative’s authority had been found to have been exceeded. What characterizes the previous cases is that the impropriety did not arise solely from the euro amount involved:

• Supreme Court 1986 II 136: providing security for a third-party debt did not even fall within the board of directors’ authority, as it was contrary to the company’s purpose and line of business.
• Supreme Court 1988:31: pledging a patent as security for the debts of subsidiaries required a decision by board of directors, as the patent was valuable to the company and central to its business operations.
• Supreme Court 1996:18: The managing director pledged bearer bonds secured by the company’s real estate to cover the debts of a limited partnership of which the managing director was a general partner. Since the pledge was not related to the company’s business operations, the managing director was deemed to have exceeded their authority in making the commitment.
• Supreme Court 2006:90: the pledge was to be considered a use of assets contrary to the Limited Liability Companies Act, as the pledge was given as security for a shareholder’s debts.

The Supreme Court did not overturn its previous case law; rather, decision 2026:9 supplements it. What the earlier decisions have in common is that the legal transaction under review was either contrary to the company’s line of business, contrary to the rules on distribution of assets, or unrelated to the company’s own business operations. In contrast, in decision 2026:9, the situation was practically the opposite: the arrangement was consistent with the company’s line of business, served the company’s own business operations, and was linked to a previous investment made with the board of directors’ knowledge.

What the supreme court did not assess – note on the bank’s position

Since the Supreme Court found that the managing director had acted within the limits of their competence and authority, there was no need to conduct a legal assessment of the requirement of good faith under Chapter 6, Section 28, Paragraph 1, Subparagraph 3 of the Limited Liability Companies Act. The Supreme Court therefore did not specifically assess whether the bank had fulfilled its duty of inquiry in its decision, even though the bankruptcy estate of A Oyj had expressly alleged in its complaint that the bank had neglected its duty of inquiry.

Paragraph 15 of the Supreme Court’s decision cites the current Chapter 6, Section 28 of the Limited Liability Companies Act as the applicable legal provision and thus did not take a position on the duty of inquiry. The legal framework regarding the protection of a bank’s/financier’s good faith thus continues to be based on prior case law and the provision as such, not on Supreme Court decision 2026:9.

Practical conclusions

As a result of the ruling, three practical considerations emerge for boards of directors and managing directors of limited liability companies.

1. Documentation should be focused on the investment phase. When the board of directors makes a decision on a major project, the decision should also cover the financing and security arrangements that the project can reasonably be expected to require. This creates a clear link that the managing director can rely on when taking subsequent legal actions to implement the project.
2. Written guidelines on authority have, if anything, become more important. The board of directors can and should set euro-denominated or contract-type-specific thresholds that require its separate approval, even if they relate to prior decisions. Such internal guidelines provide effective protection, particularly in situations where the binding nature of the managing director’s actions is assessed retrospectively.
3. The overall assessment works both ways. Although decision 2026:9 ruled in favour of the managing director , the same assessment model may equally produce the opposite outcome if the arrangement is isolated from the company’s prior operations or its financial nature deviates from what is ordinary. For example, a guarantee for third-party debt or an arrangement that substantially increases the company’s net debt does not, in principle, receive the same protection.

In conclusion

The Supreme Court’s decision 2026:9 does not revolutionize the rules on authority in limited liability company law, but it clarifies them significantly. The key message is that the managing director’s authority is determined comprehensively by the nature and context of the legal transaction, not merely by its monetary value. The ruling increases predictability in business financing arrangements, particularly in situations where an individual financing or security agreement is part of a broader project previously approved by the board of directors.

At the same time, it emphasizes the importance of the documentation practices of the board of directors and managing director more clearly than before: when the board of directors’ decision-making chain is clear, the managing director has greater certainty regarding the scope for action in finalising the arrangement.

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