Reduction of amount for which the director is liable
A director is liable under article 2:248 paragraph 1 of the Dutch Civil Code (BW) to make good the deficit in the bankruptcy if the board has manifestly mismanaged its duties and it is plausible that this was a major cause of the bankruptcy. Based on paragraph 4 of this article of law, the court can mitigate the amount for which the director is liable under certain circumstances. The Supreme Court recently issued a judgment on the possibilities of mitigation. In this article I will briefly discuss the legal regulation concerning directors’ liability in bankruptcy and I will discuss the judgment of the Supreme Court.
Directors’ liability in bankruptcy due to improper management
Article 2:248 of the Dutch Civil Code concerning improper management is relevant in the event of bankruptcy of a private limited liability company (Article 2:138 of the Dutch Civil Code in the case of an NV). On the basis of this article, each director is jointly and severally liable towards the estate to settle the estate deficit, if the board has manifestly mismanaged its duties and it is plausible that this was a major cause of the bankruptcy. Only the bankruptcy trustee can make such a claim.
Legal presumption of directors’ liability
On the basis of paragraph 2 of article 2:248 of the Dutch Civil Code, the trustee’s position is strengthened if the annual accounts have been filed too late or if the administration does not provide the required insight. In such cases, improper management is established and the legal presumption applies that the bankruptcy was caused by improper management. Read more about the distribution of the burden of proof in the article Disproving the legal presumption concerning directors’ liability in bankruptcy.
Mitigation of director’s liability
If the director’s liability is established, it may be relevant whether there is a reason to moderate the amount for which the director is liable. In principle, the director is liable to settle the estate deficit. This means the debts of the company, minus any available income. Paragraph 4 of article 2:248 of the Dutch Civil Code states about the possibility of mitigation:
“The court may reduce the amount for which the directors are liable if it considers it excessive in view of the nature and seriousness of the improper performance of duties by the management, the other causes of the bankruptcy, and the manner in which this has been disposed of. The court may also reduce the amount of liability of an individual director if it considers this excessive in view of the time during which that director held office as such in the period in which the improper performance of duties took place.”
The first sentence applies to the board as a whole (i.e. this is a collective mitigation variant). The second sentence applies only to an individual director (i.e. this is an individual mitigation variant).
Process of directors’ liability
The judgment of the Supreme Court on the possibility of mitigation was preceded by the following. A bankruptcy trustee took legal action against two directors of a bankrupt B.V. It was claimed that the directors had improperly fulfilled their duties and were liable for settlement of the estate deficit, as well as an order to pay the deficit. The court allowed the claims. The Court of Appeal upheld the judgment.
Appeal to reduce amount of directors’ liability
The Court of Appeal also dealt with an appeal by the directors to reduce the amount for which the directors are liable. The Court of Appeal was of the opinion that there are no grounds for moderation, because it has not become plausible that there were other important causes of the bankruptcy, nor is there any indication that the estate was incorrectly settled by the trustee.
The grounds for mitigation are exhaustive
The directors go to the Supreme Court. They argued that the grounds for mitigation in article 2:248 BW were not exhaustive. They argue that they have also pointed out other circumstances and that the Court of Appeal should have discussed these in substantiated terms. One of the circumstances is that the companies of the group are the largest victims of the bankruptcy.
The Supreme Court does not follow this view and dismisses the appeal. It considered that both the text and the parliamentary history of Section 2:248 (4), first sentence, of the DCC show that the grounds for reducing the amount for which the directors are liable are exhaustively enumerated in this provision. Therefore, the Court of Appeal did not have to examine the arguments of the directors that relate to grounds for mitigation that are not included in this provision.
Lawyers in corporate law and insolvency law
Should you have any questions about directors’ liability please feel free to contact Peter de Graaf.
