Directors’ liability

When can directors be held personally liable? What can directors do to prevent being held personally liable?

Representation of a legal person

Legal entities, such as BVs (private limited company), NVs (public limited company), associations or foundations, can only be represented by one or more natural persons, the directors or other authorized persons. These are often natural persons, but may also be legal entities.

Directors conclude contracts on behalf of the legal person. If the company fails to comply with agreements arising from the contracts or causes damage, the company can be addressed, not the directors. However, in certain cases directors can be held personally liable by third parties (externally) or by the company itself (internally). When will this happen?

Internal directors’ liability

When a director does not perform his tasks properly, the company can hold him liable for the damage it was caused. This is referred to as internal directors’ liability. Every director is obliged to perform his duties properly pursuant to Section 2:9 of the Dutch Civil Code. If a director or one of his fellow directors performs his duties improperly, he is liable to the legal entity for the full amount of the damage. However, there is a way out for the director: if he cannot be seriously blamed and he has not been negligent in taking measures to avert the consequences, he can be released from the obligation to pay compensation.

Directors can be held internally liable of the damage caused because the director:

• Needlessly took high financial risks, or
• Represented the company without proper authorization.

Furthermore, in the event of bankruptcy, directors can be held liable for the shortfall in the estate if they have performed their duties improperly. However, this must have been a significant cause of the bankruptcy.

A recent ruling by the Arnhem-Leeuwarden Court of Appeal illustrates internal director liability. In this case, the directors were sued by the company for improper management because they had unlawfully withdrawn funds from the company. The court ruled that the directors had not performed their duties properly and that they could be seriously blamed for this. Therefore, the directors were held liable for the damage suffered by the company.

Another recent ruling by the Arnhem-Leeuwarden Court of Appeal shows that directors can be held personally liable by the receiver on behalf of the company in the event of bankruptcy. This case concerned a private limited company that went bankrupt with a shortfall in its estate. The court found that the directors had performed their duties improperly and that this was a major cause of the bankruptcy. The directors had frustrated negotiations to prevent the bankruptcy and had not recorded payments correctly. Because the directors were unable to provide convincing evidence of an alternative cause of bankruptcy, they were held personally liable for the shortfall in the estate.

Collective directors’ liability

In principle, internal directors’ liability is collective. Thus, all board members are liable. An individual board member can avoid liability in the following cases:

• He can prove with regard to his agreed specific duties and powers that he was not negligent and thus cannot be blamed. Therefore, it is of importance that a division of tasks is made in writing.
• He has had recorded explicitly that he was against the decision that caused damage to the company or third parties.

External directors’ liability

In the event of external directors’ liability, directors are held liable for damage caused to third parties, such as suppliers of the company, suffering from directors’ actions.

For instance, a director can be held liable by third parties when damage was caused because the director:

• Bought products on behalf of the company, when he knew they could not be paid.

In addition, a director may be held personally liable if he commits an unlawful act against a third party. The decisive factor is whether he can be seriously blamed for this. This must involve conscious or foreseeable actions that harm third parties.

A director may also be liable if he gives a misleading representation of the financial situation of the company, for example through the annual accounts. In that case, third parties who suffer damage as a result can hold the directors personally liable.

In a case before the Amsterdam District Court, the director of two companies was successfully held personally liable by the landlord of his business premises. Among other things, the director had ensured that the landlord was unable to collect rent arrears. Not only had the director emptied his company’s bank account, but he had also transferred the company’s inventory to a third party without compensation. The value of this would have been sufficient to pay the rent.

Serious personal blame

The damage can only be recovered successfully from the director when a serious personal blame can be made towards him. Thus, a minor mistake does not lead to directors’ liability.

Directors’ liability insurance

A directors’ liability insurance (D&O insurance) covers a significant part of the directors’ liability, namely what is caused by serious culpable conduct. However, damage caused intentionally is not covered by the insurance.

Directors’ liability lawyer

Our lawyers have been advising both, companies and directors on external and internal directors’ liability for many years. We assist them by organising workshops but also by holding liable directors, and representing directors that are held liable. Would you like to learn more about or make use of our legal assistance? Please contact: