Our legal system is based on the principle that a director of a legal entity is not privately liable for the debts of that legal entity. This is also called "the shield of legal personality."
However, circumstances are conceivable in which this shield is breached. As a result, a director (in addition to the legal entity) does become privately liable for the legal entity's non-performance and the resulting damages.
Reinier Pijls previously wrote an article on the three main grounds for directors' liability. In this article I discuss the external liability of a director in private against a creditor of the legal entity. The legal basis for this form of liability is tort (Section 6:162 of the Civil Code).
The situation can also arise in the construction industry where a director is liable alongside the legal entity for damages suffered by a creditor of the legal entity. Especially when the legal entity goes bankrupt (and the creditor cannot recover his damages from the legal entity), it pays as a creditor to investigate whether there are grounds for directors' liability. After all, the creditor then has an additional opportunity to recover its damages.
Supreme Court case law
It is established case law of the Supreme Court that when a creditor of the company has been harmed by the unpaid and unrecoverable nature of his claim, in addition to the liability of the company, there is ground for liability of the director only if the director can be personally blamed sufficiently seriously.
There is at least when:
🛡️ the director entered into commitments on behalf of the company when he knew, or should reasonably have understood, that the company would not be able to meet its obligations and would have no recourse; or
🛡️🛡️ the director caused or permitted the company to breach its contractual obligations. Erik Jansen previously wrote an article about this second category, also known as the "compliance frustration standard."
🛡️🛡️🛡️Daarnaast Other circumstances may also arise on the basis of which serious personal misconduct can be assumed against the director.
High threshold
There is a high threshold for director liability. The rationale behind this is that only the company is in a direct legal relationship with the creditor and the director is only a representative of the company.
In addition, a high threshold for liability prevents directors from having their actions determined to an undesirable degree by defensive considerations: instead, the director must have room to maneuver in order to take considered risks for the benefit of the company.
Rotterdam court ruling
That the freedom of movement of a director to take risks is not entirely unlimited was once again demonstrated by a recent ruling by the Rotterdam District Court. Namely, the court ruled that the director of a contractor was privately liable for the damages suffered by the contractor's clients.
What was going on?
Two private clients had entered into a building contract with a contractor (in this case, a limited liability company) for the construction of a shell house. In the building contract, the parties had agreed on a number of partial payments for the work and purchase of materials.
Among other things, the principals were due a partial installment once the contractor proceeded to order stone strips from its supplier. The same applied when placing an order regarding materials for the zinc-look roof. With regard to the window frames, the principals owed two installments under the construction contract, namely at the time of ordering from the supplier and after installation of the window frames.
The contractor had subsequently charged different invoices for both the stone strips, the zinc-look roof and the window frames, under the explicit assurance that the materials had been ordered from the supplier. A few months later, the contractor went bankrupt and it turned out that the invoiced installments had never been passed on to the supplier. The principals then decided to initiate civil proceedings against the director of the contractor to recover the damages they had suffered.
The court's opinion
The court ruled that by sending the invoices, the director had wrongly created the appearance that the orders had already been placed in order to thereby induce the clients to pay. Moreover, the director had explicitly promised that he would use the payments received for work and purchase of materials, which he subsequently failed to do. In doing so, the director acted contrary to what is customary in social intercourse according to article 6:162 BW. The director was ordered to pay €32,676.23 in private damages and €1,101.76 in extrajudicial collection costs.
Conclusion
It is not entirely clear from the court's deliberations whether the director's wrongful conduct in this particular case should be classified under the second category formulated by the Supreme Court (bringing about or allowing the company to fail to fulfill its contractual obligations) or whether this form of creditor harm falls under the "other" category.
What is clear from this ruling, however, is that when a director induces the other party of the company to pay under false pretences , he is acting contrary to what is customary in society. In doing so, the director can be made a sufficiently serious personal reproach. The director is then liable in private for the damages suffered by the creditor. In this case, the director should not have invoiced the installments until he had actually placed the orders with the supplier. He also should not have made the promise that he would use the payments received for work and purchase of materials.
In short, it is useful for creditors to investigate whether there may be opportunities to hold the director or other third parties liable in addition to the legal entity. The attorneys in our team specializes in directors' liability issues and high end debt collection. Please feel free to contact Erik Jansen, Reinier Pijls or Heleen Wessel-Krijger if you have any questions in this regard.
