According to the Finnish Limited Liability Companies Act, the managing director is responsible for the day-to-day administration of the company in accordance with the instructions and regulations issued by the board of directors. The managing director may only take unusual or far-reaching measures, taking into account the scope and nature of the company's operations, if the board of directors has authorised him or her to do so or if a decision by the board of directors cannot be expected without causing significant harm to the company's operations. In practice, this means that the managing director may handle routine matters relating to the company's normal business operations, while major and significant decisions fall within the responsibility of the board of directors.

The question of whether a significant financing arrangement falls within the managing director's authority or requires authorisation from the board of directors has been open to interpretation in practice. In January 2026, the Supreme Court of Finland issued a precedent ruling (KKO:2026:9) clarifying this important question concerning the boundaries of day-to-day management.

Supreme Court precedent KKO:2026:9

In this case, a limited company operating in the construction industry purchased shares in a housing company which entitled it to control the apartments under construction. A portion of the purchase price remained unpaid. After the transaction, the company continued to complete the construction of the apartments. The company's managing director, who had the sole right to represent the company under the articles of association, took out a short-term loan of EUR 3.7 million from a bank for the company and pledged the housing shares as collateral for the loan. The company used the loan to pay the final purchase price for the apartment shares. The company repaid the loan to the bank after selling the apartment shares once the apartments had been completed. The company later went bankrupt, and the bankruptcy estate demanded that the payment made to the bank be reversed, claiming that the managing director had exceeded his authority in the financing and pledging arrangement.

The Supreme Court ruled that the question of whether a legal act falls within the scope of the managing director's authority must be decided on a case-by-case basis. In principle, the managing director has the right to decide on legal acts related to the company's normal business activities, but the managing director may not, without the authorisation of the board of directors, take unusual or far-reaching measures, taking into account the scope and nature of the company's activities.

According to the Supreme Court, the assessment should not be based solely on the financial significance of the legal action but should be an overall assessment. Although the EUR 3.7 million loan and the value of the collateral were significant in relation to the company's turnover, the Supreme Court considered that the managing director's authority could not be assessed solely on the financial basis of the significance of the actions in relation to the company's turnover and assets. Taking out the loan and providing collateral were in line with the company's business objectives. The loan and the provision of collateral were closely linked to a binding investment decision already made by the company, and the pledged shares were already in the bank's possession as part of a financing arrangement related to the same project. The arrangement was a short-term and temporary financing arrangement, in which the loan was used to pay off a debt related to the share transaction. Moreover, the loan and the pledge did not increase the company's total debt or collateral.

The Supreme Court considered that, under these circumstances, taking out the loan and providing collateral fell within the managing director's authority and did not require authorisation from the board of directors.

The ruling shows that when assessing the managing director's authority, the business context of the arrangement can be taken into account rather than solely on the basis of the monetary value of the arrangement. Short-term temporary financing related to the company's own debt and linked to an investment decision made earlier by the company may fall within the managing director's authority, even if the financial significance of the arrangement is considerable.

The diligence of the contractual partner is also important

Previous case law concerning the authority of the managing director has also emphasised the financier's duty of care. In case KKO:1996:18, the managing director of a limited company, who had the sole right to sign on behalf of the company, had transferred promissory notes attached to the company's real estate as security for the debts of a limited partnership of which he was a general partner. The managing director was found to have exceeded his authority. It was not demonstrated that the recipient of the security had ensured that the pledge served the limited company's business and did not infringe the rights of the company's shareholders and creditors. The pledge was not binding on the limited company.

When collateral is provided for a debt other than the company's own debt, the financier should ensure that the provision of collateral serves the company's business and does not infringe on the rights of the company's shareholders or creditors. Similar checks should also be carried out when the company provides its key fixed assets as collateral. The mere fact that the managing director has the right to sign on behalf of the company and owns the majority of the company's shares does not relieve the financier of its obligation to verify whether the managing director's authority has been exceeded.

What should companies consider when dividing authority?

The board of directors is responsible for the management of the company and the proper organisation of its operations. The board should clearly define the limits of the managing director's authority by issuing explicit instructions and regulations, particularly regarding significant legal actions. This prevents ambiguity and protects both the company and its management.

When assessing whether an action is unusual or far-reaching, the nature of the legal action and the magnitude of the financial interest and business risk associated with it in relation to the nature and scope of the company's operations may be taken into account. The assessment may also take into account whether the legal action is related to decisions already made by the company or whether it is a completely new business decision.

From the financier's point of view, the focus is on fulfilling the duty of care. The counterparty should ensure that the person signing the agreement is both authorised to represent the company and empowered to enter the specific legal transaction.