Director now also liable for damage caused by co-director
In its ruling of February 17, 2017, the Dutch Supreme Court extended the directors’ and officers’ liability in a significant way. This ruling can have major consequences for co-directors who did not commit a wrongful act themselves, but who can be held liable for the consequences.
What happens if this other director crossed the line behind your back? Will you be personally, jointly and severally liable then as well?
Article 11, Book 2, Dutch Civil Code states that a director cannot hide behind a director/legal entity and is jointly and severally liable based on Book 2 of the Dutch Civil Code. Those grounds are based on improper performance and liability of directors in the event of bankruptcy.
However, what’s new is that the Dutch Supreme Court considered that article 11, Book 2, Dutch Civil Code is applicable in all cases where a legal entity is liable in its capacity of director based on the law and that also means the important category of the wrongful act of Article 162, Book 6, Dutch Civil Code.
Think of the situation in which an operating company commits a wrongful act and the operating company has a director/legal entity. The natural person is liable, in principle, unless he can state that he cannot be seriously personally blamed for the acts that the wrongful act is based on.
This case concerned a wrongful act by one of the two directors of the operating company who sold fruit as a commission agent and reported sales that were way too low. He did this to bring down the payment of commission. The money “earned” with this, was pulled out of the operating company. As a result, the client could not recover his later claim on the operating company. Next, the holding company applied for a moratorium for the operating company, which resulted in a bankruptcy. Both natural persons were personally held liable as director. The one director made false statements and was held liable for this. The other director stated that he had nothing to do with this forgery of documents and contested the personal and joint and several liability.
Opinion of the Supreme Court
The Supreme Court finally ruled that you can look right through the legal entity/director based on Article 11, Book 2, Dutch Civil Code, with other liabilities than improper performance and bankruptcy, such as wrongful acts. In other words, the other director is jointly and severally liable based on Article 11, Book 2, Dutch Civil Code, unless he can argue and prove based on the requirements of Article 162, Book 2, Dutch Civil Code that he is not to blame.
The Supreme Court also took an interesting decision on the distribution of the damages. The Court of Appeal found that the claimants should share with other creditors, proportionally to their claim. However, the Supreme Court ruled that when there were still enough assets to pay all claims at the time of the wrongful act, that there is no reason to limit the claim to a distribution on a proportional basis.
TIP: directors under the articles of association are required to take a pro-active approach, also towards your business partner. If your activities within the board of directors are limited, it is advisable that this is recorded in the board regulations, and to also factually comply with this. This will help to prove that you cannot be blamed.
Do you want more information about your directors’ and officers’ liability? Please contact one of the attorneys of Fruytier Lawyers in Business.