Director liability. One of the advantages of a company, such as a BV or an NV, is that the (natural) persons behind it are not directly liable for the company’s debts. This is in contrast to, for example, a sole proprietorship, a general partnership (maatschap) or a VOF (after the introduction of the bill on partnerships this will change somewhat). Owners are, in principle, not liable if the company fails to pay debts and claims, fails to fulfil agreements, and causes damage. Shareholder liability is rare. Directors, however, do run the risk of being caught out. In the Netherlands, directors can be held liable in a number of ways by creditors, bankruptcy trustees, or even by the company itself. Below, we explain the ways in which this most often happens and give tips to prevent director liability.
1. Internal liability
Internal liability means that the company itself has suffered damage as a result of an act (or omission) by the board and that the company wants to recover this money from the director personally. This sounds like an odd situation. After all, those who act and represent the company on its behalf are generally the directors themselves. They will, of course, not hold themselves personally liable. In practice, these kinds of claims therefore only arise after the directors have been replaced by other directors, or when a bankruptcy trustee has taken over the matter following a bankruptcy.
Art. 2:9 of the Dutch Civil Code – improper performance of duties.
Under article 9 of book 2 of the Dutch Civil Code, the company can hold the board liable for the entire damage if it is established that there has been ‘improper performance of duties‘. This is a somewhat broad concept. For this reason, the Supreme Court has given guidelines for filling in the definition. Only when the director can be seriously blamed is that director liable.
Examples of this can include: unauthorised binding of the legal entity to third parties, irresponsible lending of money (without security and at the expense of liquidity), or entering into obligations that do not fit within the purpose of the legal entity.
Indications.
Sometimes there is a strong indication of impropriety, such as when the board acts contrary to statutory rules or shareholder agreements that affect the company and that the company was supposed to protect. This happens, for example, when the board has failed to obtain the statutorily required approval of the supervisory board for a particular board decision (e.g. the acquisition of another company or the purchase of real estate).
# Tip 1: Perhaps stating the obvious, but to prevent director liability it is essential for a director to know the articles of association, and in particular the restrictions and obligations they impose on the director. This prevents the director from (unknowingly) acting contrary to the articles of association. The same applies to any shareholders’ agreement. Shareholders should then inform and instruct the board about these agreements.
Exculpation.
Is there improper performance of duties? Then, in principle, all directors are liable for the entire damage. Individual directors can escape this if they prove that:
1) the shortcoming in the proper performance of duties is not specifically attributable to him, and
2) he has not been negligent in taking measures to avert the consequences thereof.
# Tip 2: Do you notice that board duties are not being performed properly? Then intervene proactively (and make sure you can prove this intervention later if necessary).
Exculpating oneself afterwards is difficult. A director who, for example, was ill during the period when things went wrong is still liable, unless he has (unsuccessfully) taken measures to prevent this kind of mistake. If there was a clear division of tasks and the mistake was made within another director’s area of responsibility, exculpation is a possibility.
# Tip 3: Ensure a clear (written) division of tasks between the directors, but also stay informed about general matters, such as finances.
Discharge.
Normally, the legal entity grants discharge to the directors from time to time. This often happens when the annual accounts are approved at the shareholders’ meeting.
# Tip 4: Adoption of the annual accounts does not automatically lead to discharge. Discharge must be a separate agenda item.
With a discharge, the legal entity declares that it will not hold the directors concerned liable for the policy pursued up to that point. Once a director has been granted discharge, he can, in principle, no longer be held accountable by the legal entity on the grounds of improper performance of duties.
# Tip 5: Request discharge annually at the general meeting of shareholders, together with a final and full release clause upon dismissal or resignation. Have this recorded in the minutes as well.
Please note! Discharge only relates to the information that was known at the time the discharge was granted to the body that granted it. The discharge also only applies to claims by the company. The bankruptcy trustee, for example, can still hold the directors liable, since he can act on behalf of the joint creditors.
2. External liability
External parties can also hold directors liable. Firstly, this can be done by the bankruptcy trustee. The trustee manages the estate on behalf of the company, but also acts on behalf of the joint creditors. That is why he is also an external party.
Art. 2:248 of the Dutch Civil Code (BV) or 2:138 (NV).
If a trustee suspects mismanagement, he will try to hold the directors liable via art. 2:248 of the Dutch Civil Code (BV) or 2:138 (NV). Through this route, directors can be held jointly and severally liable (meaning: each director can be held liable for the entire debt) for the shortfall.
Manifestly improper performance of duties.
Director liability via this route is possible if it is established that there has been ‘manifestly improper performance of duties‘. This is again a broad concept. The Supreme Court has ruled that this is only the case if ‘no reasonably thinking director – under the same circumstances – would have acted in the same way‘.
Evidentiary presumptions.
One of the reasons why trustees prefer to hold directors liable via this route is because of the evidentiary presumptions. For example, in the event of a breach of the bookkeeping obligation or the obligation to file the annual accounts on time, it is immediately established that there has been manifestly improper performance of duties. As a director, you can then only escape director liability if you can demonstrate that this was not a significant cause of the bankruptcy.
# Tip 6: Ensure proper bookkeeping to prevent director liability, so that a quick overview can be obtained of the company’s financial obligations at any given time, though other elements can also be relevant.
Annual accounts.
Particular care must be taken with the annual accounts. Do these annual accounts create a misleading picture of the company’s financial position? Then the board is jointly and severally liable for the damage suffered by third parties as a result. That is again set out in art. 2:249 of the Dutch Civil Code (BV) or art. 139 (NV).
# Tip 7: Draw up annual accounts on time and publish them on time, and ensure they do not give a misleading picture of the situation.
3. Liability via a tort (art. 6:162 of the Dutch Civil Code)
Other third parties, such as individual creditors, can also hold the director liable for damage they have suffered if the company offers no recourse. Of course, the starting point is that only the company is liable, but an exception is made for special situations.
Special situation 1: Sinking ship.
The director who, when entering into an agreement, knew (or should have understood) that the company would not be able to fulfil the agreement and would also offer no recourse, is liable for the damage suffered by the contracting party as a result. This principle emerged from the Beklamel ruling. In that case, shortly before bankruptcy, the director purchased a large quantity of baby powder, while knowing that his company could not pay for it.
# Tip 8: Besides the fact that directors, of course, must act in good conscience, they must therefore also be aware of the financial situation, so that they can assess whether transactions involving a payment obligation are indeed realistic.
Special situation 2: Ontvanger/Roelofsen.
The director who ensures that a contractual/statutory obligation can no longer be met (for example because there is no more money) and as a result of which the company also offers no more recourse for damage, is also liable for the damage suffered by the third party as a result. This follows from the Ontvanger/Roelofsen ruling. In that case, the director shifted funds and claims between his 2 BVs, causing the tax authorities to repeatedly come up empty-handed. This is also referred to as frustrating payment and recourse.
In both situations, there must in each case be a sufficiently serious personal blame attributable to the director in question.
# Tip 9: Ensure proper decision-making, especially in view of imminent bankruptcy.
General tip: Always take out director liability insurance. Such insurance generally also covers legal costs that have to be incurred in defending against a director liability claim. That way, the company is in good hands if things unexpectedly go wrong anyway.
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Questions or advice?
Our corporate legal advisers specialise in company law. If, in light of the above, you have any questions about director liability or would like help/advice on other legal matters in the field of company law, please contact us by emailing info@thelegalcompany.nl, calling 020-3450152 or filling in our contact form.
