This article briefly discusses a number of regularly occurring grounds for the liability of directors of legal entities.
Entrepreneurship involves risks. Therefore, a director has a large degree of policy making freedom in running the company. The fact that a certain decision in hindsight has not been a beneficial or onerous one will not lead necessarily to director's liability. When a director crosses reasonable boundaries, however, he may be held personally liable.
Section 2:9 Burgerlijk Wetboek (BW - Dutch Civil Code) states that the director is obliged to fulfil his duties on behalf of the company in a proper way. The act, however, does not give a further meaning to this criterion. The Hoge Raad (Dutch Supreme Council) has determined that it is considered mismanagement when a director can be 'seriously blamed’. It is called 'serious blame’ if a reasonable and experienced director would not have made the contested decision. If mismanagement is the case, the director is held personally liable for the damage towards the company.
Examples of mismanagement are:
In case a legal entity is declared bankrupt, a curator is appointed to administer the insolvent estate. Sections 2:138 and 2:248 BW give the curator exclusive powers to hold the directors and policy makers of a bankrupt company personally liable. The following is based on the provisions of section 2:248 applicable to directors of a limited liability company. Section 2:138, applicable to the public limited company, however, has equivalent meaning.
Section 2:248 states:
"In case of bankruptcy of the company, each director in respect of the estate shall be jointly and severally liable for the amount of the debts, in so far as these cannot be paid by balancing the other benefits, if the board has manifestly not properly fulfilled their duties and it is reasonable to assume that this is a major cause of the bankruptcy."
This is tested in two issues. Firstly, it has to be certain that there is manifestly mismanagement. Subsequently, it has to be plausibly shown, that mismanagement is a major cause of the bankruptcy. The burden of proof lies with the curator and he is faced with the difficult task to prove mismanagement. The legislator has met the curator half way by determining two cases in which it is certain that the board has not fulfilled their tasks properly. This is the case when:
The board has failed to keep proper accounts which show the rights and obligations of the company
The board fails to publish the annual accounts within 13 months after the end of the financial year at the Chamber of Commerce
In these cases, it is an irrefutable fact that this is mismanagement and that this mismanagement is suspected to be a major cause of the bankruptcy. The burden of proof is hereby reversed. It is now up to the director to prove that not keeping the accounts, or the failure to publish the annual accounts, is not a major cause of the bankruptcy. In many cases, the board will not succeed. In cases in which a single annual account has been published too late, it may be argued successfully that this has not been a major cause of the bankruptcy, when another external cause of the bankruptcy can be designated (think for instance of the economic crisis). If, however, the accounts are not up to par, the board will in most cases be unsuccessful in proving that, as keeping proper accounts can be viewed as a core task of the board.
Liability on the grounds of section 2:248 BW implies that the board is jointly and severally liable for the deficit in the bankruptcy. The deficit consists of the joint amount of debts plus the costs of bankruptcy minus the realised proceeds from liquidation by the curator. The deficit may, therefore, be substantial when there are insufficient proceeds in the insolvent assets.
Section 2:248 BW states that actual policy makers are in certain cases equal to directors. This means that the curator may hold the actual policy maker in the company liable on the same grounds as the board. The actual policy maker may be a natural person who uses a frontman as a director, but it may also be the parent company of a bankrupt subsidiary. If a parent company intensively interferes with the policy of the subsidiary, it may be held liable for the deficit in the bankruptcy.
Even during the bankruptcy, it is possible for individual creditors to hold directors accountable under tort, even though the curator has held the board accountable on behalf of the joint creditors. However, under certain circumstances, this joint claim of the curator may precede the individual claim of the creditor (group interest before individual interest).
Pursuant section 2:203 BW, the founders of the legal entity are jointly and severally liable for individual creditors for debts arisen during the period of incorporation if they knew or could have been expected to know that the company would not fulfil its obligations. If the company goes bankrupt within one year after incorporation, then it is assumed that the founder knew the company would not fulfil its obligations and the founder must show this was not the case. A founder need not necessarily be a director of the company, but frequently the founders, shareholders and directors are the same persons. A director-founder may, therefore, be faced with this form of liability, if the company goes bankrupt soon after incorporation.
Section 36 Invorderingswet (Collection of State Taxes Act) states that a director may be held liable in person for certain taxes payable by the company. Liability of directors enters into force when the fact that the company will not be able to pay its tax debts has not been reported in time. In order to avoid liability, the inability to pay the tax must be reported in writing within 14 days after the tax is payable.
This form of liability frequently occurs after the bankruptcy of the company. The company will not be able to pay its tax debts and the debts will subsequently be claimed from the director unless he can show that he is not to blame for the unpaid taxes.
Especially with a bankruptcy in sight, it is very important to identify possible liability at an early stage so that future problems may be prevented as much as possible. Actions that belong to the normal powers of the board may be perceived as ‘suspicious’ when a bankruptcy is in sight. Therefore, seeking advice at an early stage is not just recommended, but also necessary. We also have extensive experience as curators in bankruptcies, so we know both sides and we are in a unique position to anticipate the possible actions of the curator or individual creditors.
Leeman Verheijden Huntjens Advocaten knows the practice from both sides and often acts in the following cases:
If you would like more information or if you have any questions, please contact our office 0031 10 209 2777 or by e-mail email@example.com.
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