The concept of directors' liability is inextricably linked to bankruptcy. In the Dutch legal system, a director of a legal entity is in principle not liable in private for the debts of the legal entity. Through directors' liability, this "shell of legal personality" can be broken and a director can still be liable in private for the debts of the company.
There are different types of directors' liability. Read more about them in this article. One of these variants is liability under article 2:248 BW. This article only applies in case of bankruptcy and only the receiver can invoke it. If the company does not go bankrupt, a director is not at risk in this case.
In this article Paula Röttjers discusses two situations directors should be aware of in light of (imminent) bankruptcy and possible directors' liability under Section 2:248 of the Dutch Civil Code. It concerns 1. the violation of the administration and publication obligation and 2. making (unlawful) selective payments.
Manifestly improper management
Pursuant to article 2:248 of the Dutch Civil Code, directors of a company are jointly and severally liable for the estate deficit incurred in a bankruptcy, if the board has manifestly improperly fulfilled its duties and it is plausible that this is a major cause of the bankruptcy. Roughly speaking, the estate deficit consists of all debts that cannot be paid from the proceeds of the bankruptcy.
According to the Supreme Court, manifestly improper management exists if "no reasonable thinking director would have acted in this way under the same circumstances." Manifestly improper management thus involves irresponsible, reckless or reckless actions, which actions another director in the same situation would not reasonably have taken. The directors' liability under 2:248 BW is collective and thus covers the entire management of the company.
This does not mean every - hindsight - clumsy or unfortunate choice will immediately lead to personal liability. Entrepreneurs may take risks, but should be aware of their actions when they are in financial dire straits. Directors would therefore do well to avoid the following violations and actions.
1. Violations of duty of administration and violation of duty of publication
What is important for directors is that manifestly improper management is irrefutably established and(rebuttably) presumed to be a major cause of the bankruptcy if:
- The duty of administration of Article 2:10 BW has been violated, or;
- The publication requirement of Article 2:394 BW has been violated.
Violation of the accounting and/or publication obligation triggers these so-called "suspicions of proof", leaving you as a director 2-0 behind. After all, the manifestly improper management has been irrefutably established, only not yet that this manifestly improper management is a major cause of the bankruptcy. Only the latter can still be defended by the director.
Directors must therefore be mindful of keeping the company's records in order. The duty to keep records requires directors to ensure that the company's records are arranged in such a way that the company's financial position is clear and understandable at all times.
The publication requirement means that financial statements must always be published on time - that is, within the maximum period of 12 months after the fiscal year.
2. Unlawful selective payments
In principle, directors are free to decide which creditors to pay and in what order. There are no "rules" requiring directors to pay the company's creditors proportionately.
This changes when it becomes clear that bankruptcy is inevitable and the director must take seriously into account that not all debts can be paid. From then on, the legal ranking of creditors must be followed. A director is then no longer free to favor certain creditors by paying them to the detriment of the other creditors. In that case there is unlawful selective payment.
Whether a payment is unlawfully selective depends largely on the financial of the company at the time of payment. The worse the financial position and the greater the likelihood of bankruptcy in the short term, the sooner a payment will qualify as unlawfully selective.
An unlawful selective payment results in the director being liable in private for the resulting damages.
Liability for unlawful selective payments
Liability of directors for selective payments requires that the director has acted in such a culpable manner that he can be blamed for it in a personally serious way. This is determined by the circumstances of the case and will therefore vary from situation to situation.
In principle, personal serious misconduct occurs when a director pays a creditor who is affiliated with the company, or when he pays an unaffiliated company in which the director has a personal interest in paying that creditor on a priority basis. Directors will need to justify such payments to avoid personal liability.
Directors should therefore be vigilant at a time when they are in dire financial straits and have to make choices between who gets paid and who does not. If the company's operations have already ceased, the company has filed for its own bankruptcy, or if bankruptcy is inevitable, directors should be very cautious about selective payments. In doing so, it is wise to consider why it would be justified to pay specific creditors and not other creditors. If the trustee in an eventual bankruptcy has questions about certain payments, you will be prepared for that as a director.
