The corona crisis can cause difficulties for your company. It may not be able to supply all its customers with products, pay all its suppliers on time or otherwise fail to meet its obligations towards its contracting parties and other third parties. As a director of such a company, you may wonder which agreements you can still enter into and which risks you can still take with a view to the continuity of the company you manage.
On top of this, the question may arise as to whether the decision you take may have consequences for your private situation. Can a situation arise in which you are held personally liable for debts of the company?
As a director of a legal entity, you are in principle protected against liability for the company's debts towards a contracting party or other third parties. However, this protection is not absolute. In some cases, the liability of the company may be transferred to you as a director, so that you are personally liable.
As a director, you may be held liable by the company itself, by the receiver in the company's bankruptcy estate, but also by creditors of the company. This article discusses this third form of directors' and officers' liability.
In principle, directors' and officers' liability always requires that the director himself or herself is personally and seriously at fault. The Supreme Court has ruled that there can be such a serious personal accusation if the director is accused by a creditor of having entered into obligations in the name of the company towards the creditor when he knew or should have known that the company would not be able to meet its obligations and would not be able to recover the damage suffered by the creditor as a result. The Beklamel standard is this standard formulated by the Supreme Court for the acceptance of a personal serious accusation, on the basis of which directors' liability can be established.
As a director, it is therefore important that you do not enter into such obligations on behalf of the company. It is understandable that, especially at a time like this, this can cause a director concern. As a director, are you still allowed to make risky decisions? When will you know, or should you know, that the company will no longer be able to meet the obligations you enter into? In some cases, difficult decisions have to be made, but if this can lead to personal liability, you as a director may be deterred from doing so. The following are therefore some examples of the application of the Beklamel standard in legal practice. The aim is to show how the Beklamel standard is applied in practice so that the somewhat cryptic description of the Supreme Court becomes more tangible.
In the case of a company which, clearly for the director, was in dire straits and placed new orders while in the meantime older invoices were left unpaid, the judge ruled that the Beklamel standard had not yet been met. There was no serious personal accusation to be made against the director. The judge ruled that personal liability requires that the company is in a hopeless situation at the time of entering into the obligation and actually has insufficient prospects of continuity.
The latter criterion was also used in a judgment from 2006, in which the court ruled that the circumstance that the company on whose behalf the commitment was entered into had negative equity capital and the parent companies and subsidiaries associated with this company also had negative equity capital does not yet mean that there was a hopeless situation and an insufficient continuity perspective. This required additional circumstances, which were lacking here. The director was not personally to blame.
A ruling from October 2019 concerned a case concerning directors who had already been involved in several bankruptcies. They always made use of several interconnected companies that at first sight looked alike, with one company being used to win orders and collect amounts of money while the obligations were entered into by another company and subsequently not complied with. In this situation, the court logically ruled that the directors were personally to blame and personally liable for the debts.
The court ruled in 2008 that the fact that the liquidity position of the company in question was precarious and the tax authorities had seized the ground does not necessarily mean that the director should know that the company will not be able to fulfil the obligations it has entered into, at least not within a reasonable period of time. However, at the time when the company no longer complied with the settlement with the tax authorities, this company (and also its director) had to assume that the tax authorities would proceed with the enforceable sale of the goods affected by the seizure of the land and that, as a result, it would have to discontinue its business operations. From that moment on, the court ruled, the director should reasonably have known that the company would no longer be able to fulfil its obligations towards its creditors entered into after that date. The director was personally liable for the damage suffered by the creditors in question.
The text of the Beklamel standard is sharper than its application in practice. Moreover, it is not always the case that where there is smoke, there is also fire. At least, that is difficult for creditors to prove. As a director, you therefore need not fear that taking a - not even negligible - entrepreneurial risk may lead to your personal liability. According to case law, restraint is required in deciding whether the director knew or should have known that the company would not be able to fulfil the obligations entered into. The mere knowledge of a risk is not sufficient for directors' and officers' liability. However, if at the time of entering into the obligations the management board member knew or should have known that the risk would turn out incorrectly and the company would not be able to recoup the damage suffered as a result, he can be blamed personally and severely. In that case, the director should not have taken the decision and should not have entered into any obligations. If a company is in a critical phase, the dividing line is thin and it is wise to obtain legal advice on whether you still have to conclude a certain agreement and to what extent there is a risk of private liability.
Do you have questions about your director's liability or your risk as an entrepreneur? Please feel free to contact Justin de Vries for further advice.
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