A director is liable to make good the deficit in the bankruptcy if the board has manifestly mismanaged the company and it is likely that this was a major cause of the bankruptcy. There is a legal presumption that improper management is a major cause of the bankruptcy if the obligation to file or keep accounts has not been met. The Supreme Court recently issued an interesting ruling on the question of whether the acts or omissions of one or more directors, which in themselves do not constitute improper performance of duties, may be sufficient to negate the statutory presumption. In this article I will discuss the judgment.
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 make good the estate deficit if the board has manifestly mismanaged its duties and it is plausible that this was a major cause of the bankruptcy. In other words, there is collective liability.
Only the bankruptcy trustee can make such a claim. The trustee will have to state the facts and circumstances from which the improper management can be inferred. Next, the trustee must make it plausible that the improper management is a major cause of the bankruptcy.
Presumption of proof that improper management was an important cause of the bankruptcy
On the basis of paragraph 2 of article 2:248 Civil Code, the trustee in bankruptcy is assisted in his position of proof 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.
Division of the burden of proof according to the Supreme Court
In the Blue Tomato judgment, the Supreme Court elaborated on how the burden of proof and the burden of proof should be divided:
“A reasonable interpretation of Article 2:248 (2) DCC implies that for the refutation of the presumption laid down therein, it is sufficient for the director under appeal to make it plausible that other facts or circumstances than his improper performance of duties have been an important cause of the bankruptcy (HR 20 October 2006, NJ 2007,2). If the director puts forward an external cause, such as in this case the refusal of the fire insurer to compensate the damage of the company as a result of a fire, and the director is criticized by the trustee for failing to prevent the occurrence of that cause, the director will have to put forward facts and circumstances and, if necessary, make a plausible case that this failure does not constitute improper performance of duties. If he succeeds in doing so, it is up to the trustee to make it plausible on the basis of the first paragraph of Section 2:248 of the Dutch Civil Code that the apparent improper performance of duties is nevertheless also a major cause of the bankruptcy.”
There will be a case of the aforementioned omission resulting in improper performance of duties if no other reasonable thinking director would have acted in this way under the same circumstances.
Case on directors’ liability in bankruptcy
The case that led to the recent judgment was – simplified – as follows.
Three private limited companies have gone bankrupt. The trustee in bankruptcy has established that the accounting records are faulty, so that improper management is established and the legal presumption applies that improper management is a major cause of the bankruptcy. The trustee seeks a declaratory judgment that the accounting records did not meet the legal requirements and that the directors are liable to settle the estate deficit.
The directors defend themselves by claiming that the bankruptcy was caused by the actions of another director.
Legal presumption of management board liability: judgments of the District Court and Court of Appeal
The district court ruled that the directors had sufficiently rebutted the “presumption that the administration conducted in the second half of 2010 or the failure to timely file the 2009 financial statements contributed significantly to the bankruptcy.”
Improper administration or other factors as a major cause of the bankruptcy?
The trustee appeals. The Court of Appeal rightly finds that the District Court did not correctly apply the system of Article 2:248 of the Dutch Civil Code. The Court of Appeal notes that the violation of the accounting obligation across the board implies improper management. It is then up to the directors to make it plausible that other facts or circumstances than that improper performance of duties (i.e. not limited to keeping a bad administration) have been an important cause of the bankruptcy.
The directors still put forward contentions concerning the actions of another director. For example, they argued that sending a certain mailing to customers of the company was a major cause of the bankruptcy. The Court of Appeal is of the opinion that these assertions disregard the principle of collective liability. If the mailing can already be seen as an important cause of the bankruptcy, then this action was also taken by a fellow director, according to the Court of Appeal. The Court of Appeal concludes from this that the directors addressed are in principle liable for the bankruptcy deficit.
Supreme Court ruling on mismanagement and bankruptcy
The directors go to the Supreme Court. They argue that the judgment of the Court of Appeal has misjudged that acts of a fellow director which in itself cannot be regarded as improper management can also constitute “another important cause of the bankruptcy”, which means that the presumption of proof of Article 2:248 (2) of the Dutch Civil Code has been worked out in principle.
The Supreme Court agrees. The Supreme Court considered that in addition to external causes, acts or omissions by one or more directors which in themselves do not constitute improper performance of duties – and in respect of which it cannot be said that no reasonable director would have acted in the same way under the same circumstances – may be sufficient to refute the legal presumption of Section 2:248 (2) of the DCC.
In this respect the Supreme Court recalled that the starting point of the article of law is not to make the directors liable for the entire shortfall by the mere fact of improper management, even if this has not led to the bankruptcy.
Therefore, the Court of Appeal should not have ignored the directors’ contentions concerning the other director’s actions. Therefore, the Supreme Court set aside the judgment of the Court of Appeal and referred the case to another Court of Appeal for further proceedings.
Refinement by the Supreme Court of the doctrine of directors’ liability
With this judgment the Supreme Court has applied an important refinement to the interpretation of Section 2:248 of the Civil Code.
However, the curtain does not necessarily fall on the bankruptcy if it is established that mismanagement was an important cause of the bankruptcy. Paragraph 3 of article 2:248 DCC stipulates that the managing director who proves that he cannot be blamed for the improper performance of duties by the managing board and that he has not been negligent in taking measures to avert the consequences thereof, is not liable. It will not often be possible to successfully appeal to this, but it is possible, for example, if the director who is sued can prove that he was misled by another director.
Lawyers in corporate law and insolvency law
If you have questions about directors’ liability or have a conflict with a fellow director, please feel free to contact one of our corporate and insolvency law specialists.
