In a previously published article my colleague Chris Tijman gave four tips for directors of companies to limit potential liability (in bankruptcy). In addition to directors, de facto policymakers can also be held liable in bankruptcy.
This article tells you what a de facto policymaker is, in what cases the policymaker is liable, and how you can reduce your chances of being held liable as a policymaker.
Board liability
The (formal/statutory) board can be held liable for debts in bankruptcy if:
- it manifestly performed its duties improperly; and
- plausible that this was a major cause of the bankruptcy.
What is important here is that the manifestly improper performance of duties took place within a maximum period of three years prior to the bankruptcy. If the manifestly improper performance of duties is established and is a major cause of the bankruptcy, the entire management is, in principle, liable.
Liability of joint or actual policymakers
In addition to the directors, those ”who have determined or co-determined the policy of the company as if they were directors” (read: the co-managers or de facto-managers) may also be liable for manifestly improper management, as shown above.
Who are fellow or actual policymakers?
Joint or actual policymakers are those who have acted as if they were directors. This means that they must have actually performed management duties.
Whether the person concerned determined the policy independently (de facto policymaker) or co-determined it with the formal board (co-policymaker) is irrelevant to the assumption of liability. A de facto policymaker exists if the person involved subordinates the formal board(s) to himself and imposes his will on the board. A co-policymaker exists if the person involved does not independently determine the policy of the board, but is involved in the board and in decision-making. Policy is then determined in consultation between the board and this person.
What are the board duties?
Obviously, the board must manage the company. In doing so, it must take into account the interests of the company and its affiliated business. But this does not clarify what the board’s exact duties are.
In addition, the board has all duties that are not (by statute) assigned to another corporate body. For this reason, board duties may vary from one company to another.
How do you avoid liability as a de facto policymaker?
If you do a lot of advisory work for the board of a company or are closely involved in the decision-making of a company, you would do well to have knowledge of tasks that are the sole responsibility of the board of the company. In this way, you can avoid inadvertently acting as a de facto or co-manager and thus risking liability.
Tips
If you exercise influence over a company’s policies, you can reduce the likelihood of liability as a de facto policymaker by:
- perform your work under a clear contract (of assignment) that clearly describes your duties;
- when interacting with individuals within the company or third parties, make clear your position within the company and how that position relates to the formal board;
- perform the legal acts for the company pursuant to a limited power of attorney or seek approval from the formal board before entering into the legal acts.
Do you have questions about directors’ liability? If so, feel free to call or email me.
