Director’s liability

Director liability is the liability of the director of a legal entity, such as a private limited company, public limited company, association or foundation. This liability falls under corporate law and applies to directors acting on behalf of a legal entity. A director who does not perform their duties properly can be held liable by the legal entity or company for any damage suffered. Examples of director liability and improper management include mismanagement, taking unnecessary financial risks or acting in contravention of the company’s articles of association.

Director liability: business and private

Being a director of a private limited company is not an honorary position. Directors make important decisions on a daily basis that can have major consequences for both the company itself and third parties. This gives the board power and responsibility; they can therefore be held liable for this.

In principle, a legal entity is equivalent to a natural person in terms of property law. This means that the legal entity itself is the bearer of rights and obligations and is therefore also liable for its own debts with its own assets. Partly because of this separate asset base, the private limited company is a popular legal form. After all, directors are in principle not liable for the company’s debts. However, any director who thinks they have protected themselves against any form of private liability will be disappointed.

Internal director liability

Article 2:9 of the Dutch Civil Code regulates the liability of directors towards the legal entity itself, also known as internal director liability. The director has obligations towards the company to perform his duties in a proper manner. If the company suffers significant damage as a result of a director’s improper performance of his duties, the legal entity can hold the director or former director liable for breach of contract.

The Supreme Court has ruled that liability requires that a director can be seriously blamed for improper management. This means that there must be an undeniable shortcoming: the director has failed to fulfil his obligation to perform his duties in the manner in which a reasonably competent and reasonably acting officer should have performed those duties. Whether there is a serious accusation or unlawful act must be assessed on the basis of all the circumstances of the case.

Discharge

In practice, directors often invoke the granting of a so-called discharge. By means of a discharge, the director is released from liability for the policy that a director has pursued up to the moment of discharge.

No carte blanche

However, discharge does not give the director carte blanche against liability. Firstly, it only protects the director against internal liability and only for the director’s policy, as evidenced by the annual accounts. Discharge only covers matters that are apparent from the annual accounts or that have been explicitly communicated to the shareholders’ meeting.

Anything beyond that which has been disclosed (informally) to a shareholder but has not been formally discussed at the meeting and on which no official decision has been taken is not covered by the discharge. The effect of this is that a director cannot too easily invoke a discharge granted to nip director liability towards the company in the bud. In addition, it does not detract from the fact that directors can still be held liable externally.

Furthermore, the legislation in this area is based on the collective liability of the entire board. This means that a director can also be held liable for the activities and mistakes of other members of the board.

External directors’ liability

Directors’ liability can also apply externally, i.e. vis-à-vis third parties. Examples of third parties include creditors and the receiver in the event of bankruptcy of the company. The law recognises various situations that lead to personal liability of the director vis-à-vis third parties in the event of bankruptcy.

Collective board liability

The basic principle is that the board of a company acts collectively and is therefore collectively and severally liable for its policy. Even if a director is not directly involved in the actions causing the damage, the collective nature of the board means that that director can also be held liable, regardless of the division of tasks within the board.

If a director can be seriously blamed, the other directors are also jointly and severally liable for the damage. There are exceptions to this rule. A director may be exonerated if he can demonstrate that (I) the matter did not fall within his sphere of activity, (II) the shortcoming cannot be attributed to him, and (III) the director can demonstrate that he was not negligent in taking measures to prevent liability.

Bankruptcy due to manifestly improper management

An important legal basis for directors’ liability in the event of bankruptcy is regulated in Article 2:248 of the Dutch Civil Code. This provision sets out special rules for the liability of directors of a private limited company in the event of the company’s bankruptcy. In the event of the bankruptcy of a company, the receiver can hold the (former) directors of the company liable for the shortfall in the bankruptcy estate. A number of conditions apply to this: it must be proven that a director has performed his duties improperly and that this manifestly improper management must be a significant cause of the bankruptcy.

Poor accounting as burden of proof

The legislator assists the trustee in this regard with a special rule of evidence: if the management has not kept proper accounts or has not filed the annual accounts with the commercial register office, or has not done so on time, it is presumed that a director has performed his duties improperly and that manifestly improper management is the main or a significant cause of the bankruptcy.

In other words, the burden of proof is reversed: directors are liable unless there is evidence to the contrary. A director is not liable in the event of bankruptcy if he can prove that the improper performance of duties by the board is not attributable to him and that he has not been negligent in taking measures to limit the consequences. However, this is very difficult for a director to prove.

Legal acts prior to registration in the commercial register

Another example of a specific legal provision concerning directors’ liability is the rule that directors, in addition to the company, are jointly and severally liable for any legal act performed before the company is registered in the commercial register and before an authentic copy of the deed of incorporation is filed there.

Private and personal liability

In addition to the specific legal provisions concerning directors’ liability, case law in this area has also been active. According to case law, directors may also be liable in private to third parties for unlawful acts, tortious acts or in cases where they are held personally liable for a serious offence. Case law shows two categories of cases that are particularly likely to establish personal liability of the director for wrongful acts.

The first category concerns cases in which a director has acted on behalf of the legal entity and has committed the legal entity too lightly. The second category concerns situations in which the director has deliberately caused or allowed the legal entity to fail to fulfil its legal or contractual obligations.

Serious personal blame

In both cases, the criterion is that the director has generally only acted unlawfully if he can be seriously blamed personally. In case law, this form of director liability is understood to mean that, when entering into the commitments, the director knew (or should reasonably have understood) that the actions of the company (legal entity) brought about or permitted by him would result in the company failing to fulfil its obligations and also failing to provide recourse for the damage resulting from this (Article 6:162 of the Dutch Civil Code). Only if no reasonable director would have acted in this way is there a case of improper management.

Introduction of Flex-BV

The “Act on the simplification and flexibilisation of BV law” (Flex-BV) came into force several years ago. This has significantly relaxed the rules governing private limited companies in order to promote entrepreneurship. With the introduction of the Flex-BV, the start-up capital of €18,000 as security for creditors has been abolished. However, this has been replaced by a new form of liability for directors.

In addition, from now on, shareholders will decide on the distribution of profits and reserves. Furthermore, the decision of the general meeting of shareholders will have to be approved by the board. If the board knows, or should know, that after the distribution the company will no longer be able to pay its debts, it must reject the shareholders’ proposal. If, despite debts, a distribution is made and the private limited company is no longer able to meet its payment obligations, each director is jointly and severally liable or a director is personally liable for the shortfall caused by the profit distribution. This significantly increases the personal liability of directors within the scope of directors’ liability.

Tort law

The above shows that directors cannot always hide behind the legal personality of a private limited company in the event of a tort or unlawful act. Legislation and case law give the receiver and other aggrieved creditors many opportunities to pierce the shield of the legal entity and hold directors privately or personally liable. With the ever-evolving case law on tort and the new Flex-BV, the risks of personal liability of a director for the debts of a company seem to be increasing.

How can a director protect himself against personal liability in the event of bankruptcy?

As a director, you can be held personally liable in the event of bankruptcy if it appears that there has been improper management. You can protect yourself against this by acting in a demonstrably careful and transparent manner: ensure that your administration is timely and complete, document important decisions and continuously assess whether the company can still meet its financial obligations.

Practical example: suppose you foresee that your company will encounter liquidity problems. By seeking external advice in good time, informing creditors and possibly even applying for a moratorium in good time, you demonstrate that you are acting responsibly. This significantly reduces your personal risk.

Have your management actions reviewed regularly, especially in times of financial uncertainty. A second opinion can be crucial in avoiding liability and protecting your position as a director.

Director’s liability: expert advice

It is important for directors to protect themselves against directors’ liability and to seek expert advice. This will minimise the risks as much as possible. After all, running a (large) company or legal entity is and remains a challenging task for many directors. Our solicitors know everything there is to know about corporate law and are also familiar with every aspect for which directors can be held liable.

As our solicitors are also entrepreneurs themselves, they can easily put themselves in your shoes as an entrepreneur. Are you a director of a legal entity and looking for a specialist solicitor who is familiar with the rules of directors’ liability? Please do not hesitate to contact our firm without obligation.

Authors: Employment law solicitors Mignon de Vries and Myrddin van Westendorp