Directors’ liability

Under property law, a legal person is equated with a natural person (Article 2:5 of the Civil Code). This means that, like a natural person, a legal entity can independently acquire its own rights and enter into obligations. Because a legal person is not actually able to enter into these rights and obligations itself, the board acts on behalf of a legal person. In doing so, the board in principle has great freedom over the manner of governance. On the other hand, the director can be sued by the legal entity for damages incurred as a result of the improper fulfillment of his assigned task (Article 2:9 BW) and can also be sued by third parties (Article 6:162 BW) if the director can be blamed for a serious personal fault. However, the starting point is that only the legal entity is independently and exclusively liable for the consequences of (legal) acts committed in its name.

Under circumstances, directors can also be held personally liable for those damages. It must then be shown that they can be personally blamed. This must involve acting contrary to the care that
the director(s) should have personally exercised towards the person suffering damage.

We know of two types of directors’ liability, namely:

• liability to the legal entity itself (internal liability); and
• liability to creditors of the legal entity (external liability).

In the event that the director of a company is a legal person, liability ultimately rolls over to the natural person above it (Article 2:11 BW). With this, Dutch law aims to prevent natural persons from escaping directors’ liability through a series of legal entities. What is relevant here is that it must concern the formal director of a company and thus not the actual policymaker.

Directors’ liability is found primarily in four locations in the law, namely:

1. Article 2:9 BW;
2. Article 2:138 BW;
3. Article 2:248 BW and
4. Section 6:162 of the Civil Code (the general article on tort).

Article 2:9 BW is the core provision of internal directors’ liability and deals with so-called internal directors’ liability. This deals with directors’ liability to the legal entity. The first paragraph of this article speaks of an obligation for directors to ‘properly fulfill his task’. By ‘his task’ is understood: all tasks that are not assigned to other directors by law or the articles of association. With respect to this duty, a director may be expected to have sufficient insight and ability to perform this duty properly.

Apart from the liability to perform one’s own duties properly, paragraph 2 of Article 2:9 of the Civil Code contains a more general liability. Regardless of any division of duties, all directors are liable for the general course of affairs. This may include the strategic and financial policy of the company.

Sections 2:138 and 2:248 BW deal with liability of the board towards the trustee for the benefit of creditors in bankruptcy, so-called external liability. In principle, both articles stipulate the same, with article 2:138 BW applying to public limited companies and article 2:248 BW applying to private limited companies. Liability on this basis is a collective of all directors registered in the trade register. The trustee may also hold liable a de facto policymaker who is not registered as a director in the trade register.

Finally, a claim against directors is possible on the basis of tort (article 6:162 BW). If it can be proven that a director has entered into a (financial) obligation on behalf of the legal entity, of which he knew or should have known at the time that the legal entity would not be able to fulfill this obligation (for example, because of an impending bankruptcy) and the legal entity has no other recourse, then the director can be held liable for the damage suffered by the relevant creditor as a result. The same applies if the director impedes the payment of a debt or otherwise causes the legal entity to fail to pay its creditor(s). An example may be what is known as “selective payment. This occurs, for example, when claims of subsidiaries are paid in preference to claims of other creditors. Only the acting director to whom a serious personal reproach can be made is in principle liable.

With internal liability pursuant to Article 2:9 of the Civil Code, a director is only liable in the event of an unmistakable, obvious shortcoming. In this case there must be a personally serious fault on the part of the director. This is the case, for example, if a director has acted in violation of a statutory provision or a legal provision intended to protect the company. An example would be a provision requiring the approval of the Supervisory Board (SB) for a certain legal act.

External liability under Article 2:248 of the Dutch Civil Code only plays a role in bankruptcy. Thereby it must be sufficiently plausible that:

• the existence of manifestly improper management; and
• apparent mismanagement is a major cause of the bankruptcy.

The bankruptcy trustee is the only party who can bring this claim. If the publication and administrative obligations (this concerns more than just bookkeeping) are not properly fulfilled, it is assumed – subject to evidence to the contrary to be provided by the directors – that there has been manifestly improper management and that this was a major cause of the bankruptcy. The interpretation of the term “improper management” in bankruptcy involves the performance of duties in the three years preceding the bankruptcy.

According to case law, manifestly improper management can only be spoken of if no reasonable thinking director would have acted in the same way under the same circumstances as the director held liable. Moreover, the director must have acted with the knowledge that creditors will possibly be harmed by his actions. This does not mean that he should actually have known this. It is sufficient that the director could reasonably have known this.

If manifestly improper management is assumed, the board is liable for the deficit in the bankruptcy. Only in special circumstances may an individual director evade collective liability (“exculpate himself”).

The risk of directors’ liability already arises at the time the legal entity is still in the incorporation phase. Whether a company is still in the incorporation phase can be recognized by the mention ‘i.o.’ after the trade name.

If a director of a company in formation performs legal acts, this director remains personally liable for them until the company has ratified these legal acts (Article 2:203 BW). From that moment on, liability passes to the company itself. As a director of a company in formation, it is therefore important to ensure that the company ratifies the legal act after incorporation.

Even if the company has ratified a legal act, liability of the director may still exist. This is the case if the company does not fulfill its obligation from the ratified legal act and the director knew or could have known that the company would not be able to fulfill the obligation. The latter is assumed if the company goes bankrupt within one year of incorporation. In that case, the founder will have to prove that incurring debts during incorporation did not lead to the bankruptcy of the legal entity.

It is difficult to say in advance how high a claim can be made on the basis of directors’ liability under Articles 2:9 and 6:162 of the Dutch Civil Code. The amount of a claim in liability proceedings can only be based on damages suffered. This is different in bankruptcy, where the estate deficit is recovered from the director.

Van Veen Advocaten has been advising on personal liability risks for directors for many years. In the event that you are found liable, we can assist you in proceedings, both in and out of bankruptcy. If you have any questions about this, please do not hesitate to contact us.