Directors' liability for failure to make provision (part 2)

Case law on failure to make timely provision and pay dividends

Earlier I wrote a blog about the need to make a provision as a director of a company if you have to take serious account of a claim. If you do not make a provision and therefore do not take such a claim into account when paying dividends, you may be liable as a director.

Case law on failure to make provision on appeal

This may also be the case if a claim against a (contracting) party has been awarded by a court and that party, under threat of enforcement of that judgment, satisfies the claim but appeals. If the judgment is overturned on appeal, your company has acted unlawfully and is liable for damages. Under special circumstances, you may also be liable as a director (in private), i.e., in addition to the company. According to established case law, this may be the case in the event of frustration of payment and redress that puts the other party at a disadvantage and in which you, as a director, act with serious culpability.

In the judgment of the Arnhem-Leeuwarden Court of Appeal of May 12, 2020, the court of appeal ruled that what may be relevant in this regard is (i) whether, based on the circumstances known to him, the director should have taken into account the possibility that the judgment would be set aside, (ii) whether the director knew or seriously should have taken into account the possibility that in the event that the judgment would be set aside, the company would not be able to repay the amount received, and (iii) whether in the circumstances the director can be blamed for having nevertheless allowed a claim to be paid, neglecting the interests of the person served.

If your company is unable to proceed to repayment after setting aside the judgment on appeal, the first two conditions mentioned above will soon be met. Crucial in such a situation is therefore the third condition. The court indicates that this is met if the collected money has been used for payments that are not necessary. In the present proceedings, the company had used the collected money to pay off the (non-claimable) current account claims of the directors and affiliated companies, while these payments were not necessary. Accordingly, the court found that there was directors' liability. The outcome might have been different if the amount had been spent on the ordinary operations of the company in order to continue the business.

For practice

If your company must seriously consider that an amount must be repaid after an appeal, and repayment from the company's assets is not possible, you should make a provision for this or spend this amount only on ordinary business operations. Payment of claims that are not necessary, such as payment to related parties, is then unwise. If you do not make a provision or do not take into account the use of the collected amount, this can affect you as a director (in private).

The attorneys on my team specialize in directors' liability issues so please feel free to contact me with any questions.