Charity directors sooner liable

The Act on Management and Supervision of Legal Entities (Wbtr) entered into force on 1 July 2021. Under this Act, charity directors may be sooner liable. What has changed?

The Wbtr has aligned the management and supervision of all legal entities to the extent possible. As a result, for example, the dismissal regulation for foundation directors has changed. Also, the regulation for directors’ liability for NVs and BVs and now also applies to charity directors. This mainly has consequences for liability in case of bankruptcy.

Directors’ liability

The main rule for directors’ liability is that directors of legal entities cannot be held personally liable. This is different if they are guilty of serious culpability or intent. This rule has not changed.

Directors liable in the event of bankruptcy

Under the Wbtr, directors of non-profit organisations may also be jointly and severally liable for an estate deficit if the foundation goes bankrupt. This is the case when the bankruptcy is partly due to mismanagement. Directors can avoid liability if they can prove that:

1. The improper management is not their fault.
2. They have not failed to take measures to prevent the mismanagement from having consequences.

There is, however, a significant difference regarding BVs and NVs and commercial foundations. Here, the starting point is that bankruptcy is the result of mismanagement if the obligation to keep records or publish annual figures has not been met. This presumption does not apply to non-profit organisations. But of course it is advisable that directors keep a good eye on the financial situation. Even if it is only to maintain the confidence of benefactors and providers of subsidy.

Mismanagement of a charity: an example

What has changed becomes clear when we look at a case from 2018. As so often, this issue started with good intentions. Parents wanted to start their own school, which would work with a new teaching method. To this end, they set up a foundation with the optimistic name Perpetuum. Almost immediately it turned out that the government would not subsidise the school. School fees were deliberately kept low. So there was no income, but expenses and debts. This situation could not last forever for Perpetuum. Bankruptcy was unavoidable. This is exactly the situation the change in law is about.

The trustee of the foundation demanded that the directors and the head of the school pay the foundation’s estate deficit including bankruptcy costs. The court did not agree. The directors did not fall under the regulation for commercial foundations which made them liable for the estate deficit. They were therefore only liable for the damage they had caused the foundation, namely the debts incurred and unpaid bills. Bankruptcy costs were not included. And it is precisely this regulation that now applies to directors of non-profit organisations.

In addition, in this case the damage had to be demonstrated and it had to be proved that it was caused by the actions of the directors. Under the new regulation it only has to be possible to make a connection between mismanagement and bankruptcy. Then, the starting point is that the directors are liable for the entire estate deficit.

Are volunteers less likely to be liable?

In the case discussed, the directors argued that they were not paid and did not benefit from their policy. On the contrary, they had invested a lot of time and also their own money. One of the directors also stated that he had been doing a friend a favour and that he did not know a lot about management and education. Did that reduce his liability? No, because volunteers are also responsible for their actions, in other words: doing good must be done well.

However, there was reason to reduce the damages of almost 100.000 euros. In addition to the good intentions and the lack of own benefit, the court also considered the consequences of higher damages to be unacceptable. After all, the directors did not have any financial reserves. Nevertheless, they were still jointly and severally liable for damages of more than 70,000 euros.

Points of attention

• Charity directors should take into account that they can be sooner liable if a foundation goes bankrupt.
• Make sure the foundation does not enter into obligations it cannot fulfil.

Charity lawyers

Do you have any questions regarding the Wbtr and its consequences for your charity? We will be happy to give you advice. If you have a dispute with your fellow board members, we can also assist you, if necessary also in legal proceedings. Our lawyers are also directors of charities and know what is going on in practice. Please contact us: