When are you personally liable as a director?
You cannot run a business without risk, and Dutch law takes that into account. A director is not easily liable in private. But there is a limit, and the number of claims is rising. Here is where that limit lies.
The threshold: a serious personal reproach
Under settled Dutch case law a director is only liable once a serious personal reproach can be made. That is a high threshold, and deliberately so. Were it otherwise, directors would become too cautious, which is economically undesirable.
The two classic cases are these. You enter into an obligation on behalf of the company while knowing, or reasonably having to know, that the company could not perform it and would offer no recourse. Or you bring about or permit the company failing to meet its statutory or contractual obligations.
In that second case the court distinguishes between unwillingness and inability. Inability is unfortunate but usually not culpable. Unwillingness, for instance paying selectively in favour of yourself or a related party, is.
Where it goes wrong in practice
Risky is promising particular proceeds to a specific creditor and then failing to deliver. Allocating the company’s means in that way creates a real exposure.
Another pitfall is failing to notify the tax authority and the pension fund of inability to pay within the statutory period. If you miss that window, a presumption arises that you as director culpably allowed the situation, and that presumption is exceptionally hard to rebut.
Further: annual accounts that give a misleading picture, or that were filed late. In bankruptcy, late filing gives rise to a presumption of improper management.
Who can hold you to account?
Not only contracting parties and creditors. Also shareholders, the trustee after a bankruptcy, and the company itself. That last route is often forgotten and comes into view particularly after a change of board.
Eight things you can arrange
- Know the articles and the shareholders agreement, so you do not act contrary to them
- Intervene as soon as you see that board duties are not being properly performed
- Record the division of duties within the board, and stay informed about what is not your task
- Keep the administration in order and file the annual accounts on time
- Stay informed about the financial position before you enter into obligations
- Be extra careful in your decision making as soon as insolvency threatens
- Notify inability to pay to the tax authority and the pension fund in time
- Take out proper directors liability insurance, and read the exclusions
That last point deserves emphasis. Many policies exclude intent and unpaid taxes, precisely the situations where things go wrong. Have your policy laid alongside your actual exposure.
Frequently asked questions
I have just resigned. Am I safe now?
No. Liability attaches to the period in which you were a director. Resigning does not work retroactively and does not protect you against claims about earlier conduct. It is wise to have your resignation correctly registered with the Chamber of Commerce, because otherwise you continue to appear as director for what happens afterwards.
What is the significance of filing the annual accounts late?
In bankruptcy that counts as improper performance of duties, with the statutory presumption that it was an important cause of the bankruptcy. You then have to show the bankruptcy had another cause, and that is a heavy burden.
Does this also apply to a foundation or association?
Yes. Since the Dutch Management and Supervision of Legal Entities Act, comparable standards apply to directors and supervisors of foundations and associations. Many directors of smaller foundations are unaware of this.
I have been held liable. What do I do first?
Notify your insurer immediately, even if you think the claim is baseless. Late notification is one of the most common grounds for a coverage defence. Beyond that, do not respond on the substance before you have had legal advice on what is actually being alleged.
Is a claim running, or threatening?
I act both for directors who are being held liable and for parties seeking to hold a director to account. The first conversation costs you nothing.