The risk of directors' liability

The main rule in our legal system is that a director of a legal entity is not liable in private for the debts of that legal entity. This is called "the shield of legal personality."

However, there are conceivable circumstances in which this shield is breached. As a result, a director is in fact privately liable.

When is that the case?

In this article, I discuss the three main grounds for directors' liability. These are:

1. Improper performance of duties (Article 2:9 BW);
2. Improper administration (Article 2:248 BW);
3. Unlawful act (Article 6:162 of the Civil Code).

I will briefly explain each ground below.

Improper performance of duties: article 2:9 BW

Every director is obliged towards the legal entity to properly fulfill the task assigned to him. If a director fails to do so and can be seriously blamed in this respect, he is liable to the legal entity.

Thus, there are two requirements for liability under Article 2:9 BW:

1. Improper management by the director and
2. The driver can be seriously blamed for this.

To answer the question of whether there has been (un)proper administration, it must be ascertained whether the management task has been performed with the insight and care that may be expected of a director who is prepared for his task and performs it meticulously.

So it is necessary to look at how a prudent director - the Maatman director - would have performed the task.

According to the Supreme Court, all the circumstances of the case must be looked at in order to determine whether a serious fault exists. Relevant circumstances, according to the Supreme Court, are:

1. The nature of the activities to be carried out by the legal entity;
2. The generally resulting risks;
3. The division of labor within the board;
4. Any guidelines in place within the board;
5. The data that the driver possessed or should have possessed;
6. The insight and diligence that can be expected of a director who is calculated for and conscientiously performs his duties.

In any case, improper performance of duties and serious misconduct do not apply to everyday errors. Directors have to deal with risks.

Acting contrary to statutory provisions intended to protect legal persons does, as a rule, lead to a finding of improper performance of duties and serious culpability.

It is good to know that Article 2:9 of the Civil Code concerns collective liability. This means that if one director is at fault, in principle all directors are jointly and severally liable.

All the more reason to be keen on fellow board members!

Improper administration: article 2:248 of the Civil Code

Article 2:248 BW provides that in the case of a company's bankruptcy, each director is jointly and severally liable to the estate for the estate deficit - roughly put, all debts that cannot be paid from the proceeds of the bankruptcy - if:

1. The board manifestly performed its duties improperly;
2. It is likely that this apparent mismanagement was a major cause of the bankruptcy.

Article 2:248 BW applies only in bankruptcy. Only a receiver can invoke this article. If the company does not go bankrupt, you are not at risk under this article.

In substance, the standard of Article 2:248 BW corresponds to a large extent to Article 2:9 BW.

Indeed, the Supreme Court has ruled several times that manifestly improper management occurs when "no reasonable thinking director would have acted in this way under the same circumstances."

What is important for practice is that the manifestly improper management is irrefutably established and further, that this manifestly improper management is presumed to be a major cause of the bankruptcy if:

1. The duty of administration of Article 2:10 BW has been violated, or;
2. The publication requirement of Article 2:394 BW has been violated.

As a director, it is therefore important to keep the company's records in order and always publish your financial statements in a timely manner - that is, within the maximum period of 12 months after the fiscal year.

Article 2:248 BW concerns collective liability. The article - like article 2:9 DCC - allows individual directors to exculpate themselves and the damage can be mitigated under circumstances. It is up to the director to make a reasoned appeal to this.

Unlawful act: article 6:162 BW

In addition to the director's liability to the legal entity under Article 2:9 BW and the director's liability to the joint creditors in bankruptcy under Article 2:248 BW, a director may also be liable to a third party (often an individual creditor). The basis for this is tort (Article 6:162 BW).

Article 6:162 BW stipulates that he who commits an unlawful act towards another, which can be attributed to him, is obliged to compensate the damage suffered by the other as a result.

With regard to this director's liability, case law has elaborated that a director's tort against a third party only exists if the director can be blamed for a personally serious act.

Personal serious fault generally exists if:

1. The director enters into an agreement on behalf of the legal entity, where the director knows that the legal entity cannot fulfill its obligations under the agreement and has no recourse;
2. The director brings about or allows the legal entity to breach a contract already entered into and fails to provide redress;

In addition to the aforementioned situations, there are other conceivable situations in which there may be personal serious misconduct. For example, it is very risky to allocate certain proceeds of the legal entity to a certain creditor and then fail to do so. Indeed, allocating proceeds of the legal entity in this way also carries the risk of directors' liability.

Conclusion

This article describes the most common situations of director liability. Thus, it is important for a director to pay attention to at least these situations to avoid the possibility of private liability as much as possible.

The situations I have described are non-exhaustive. Other situations are conceivable in which a director is liable in private.

For example, you can think of liability to the tax authorities for failure to report (on time) an inability to pay (article 36 Invorderingswet 1990), liability for misleading financial statements (article 2:249 BW), or liability for the compulsory registration of a company in the Trade Register (article 2:180 BW).

In short, the shield of legal personality is not always as strong as it first appears.

This creates risks for a director and opportunities for a creditor who feels aggrieved and wishes to hold the director liable.

Given the foregoing, it is useful for directors to have a quick-scan performed periodically to see if they are at risk. This applies in both good times and bad.

Based on that quick-scan, concrete measures can then be taken to minimize the risk of directors' liability.

It is useful for creditors to investigate whether there may be opportunities to hold the director liable in addition to the legal entity. Indeed, this can sometimes pay off.