Failure to provide bank guarantee does not lead to directors' liability

In a recent case that was before the Arnhem-Leeuwarden Court of Appeal,[1 ] the court ruled that the directors of the general contractor did not know or need to understand that the company/main contractor would have no recourse, for damages resulting from the failure to provide a bank guarantee.

What was going on?

This case involved a 30-year partnership between a general contractor and a subcontractor. On a project in the spring of 2015, the general contractor was unable to meet its payment obligations. The directors of the general contractor therefore engaged in cash management: as soon as liquidity was available, payments were made. Furthermore, among other things, they sought extension of external financing from their house bank and from a third party for the second half of 2015.

The subcontractor could not be paid in part, after which the parties negotiated a payment arrangement. In that context, the general contractor made a commitment to provide a bank guarantee. This bank guarantee was ultimately not provided to the subcontractor. Because the third party failed to fulfill its financing commitment to the general contractor, the latter filed for bankruptcy.

Question to the court

The court had to rule - essentially - on whether the directors were personally liable because the promised bank guarantee in favor of the subcontractor was not provided.

Directors' liability - high threshold

The court of appeals stated that if a company fails to fulfill its obligations, the basic principle is that only the company is liable for the resulting damage. Only under special circumstances, besides liability of the company, can there be room for liability of a director of that company. Previously, my office colleague Reinier Pijls wrotea blog about the main grounds for directors' liability.

Directors' liability requires that the director in question be personally blamed for the wrongdoing. To determine whether this high threshold for liability is met, the nature and seriousness of the standard violation and the other circumstances of the case play a role.

Verdict

It was agreed between the main contractor and the subcontractor that a bank guarantee would be provided. This was not done. According to the court, why the bank guarantee was not provided is immaterial. For a personal liability of the director - in addition to the company - based on wrongful acts, it is required that the director can be blamed sufficiently seriously. In addition, it must be established that the director knew or should have understood that the company would have no recourse for the damages as a result.

At the time the promised bank guarantee was not provided, the directors assumed that the third party would provide additional financing. This would allow the outstanding debts of the main contractor - including the subcontractor's claim - to be paid. When it unexpectedly appeared not much later that this financing would not be forthcoming, the viability of the group of affiliated companies and of the general contractor had disappeared. Under these facts and circumstances, the court of appeal comes to the conclusion that the directors cannot be personally blamed for the performance of their managerial duties. They are not personally liable towards the subcontractor.

Should you, as a director, be personally sued by a trustee, it is advisable to engage an expert to have all options for defenses assessed.

[1]Arnhem-Leeuwarden Court of Appeal October 6, 2020, ECLI:NL:GHARL:2020:8021