Consequences of discharge of director

Discharge is generally granted to directors on an annual basis and also upon their resignation. What does this discharge entail and how far does it extend? Does the discharge also apply if a director did not perform his duties properly and, for example, enriched himself at the company’s expense or did not have the administration in order?

A director is bound by the Civil Code of the Netherlands to perform his duties properly. When a director fails to perform his duties properly, the legal entity, a trustee in bankruptcy or a third party, may hold the director liable for the damage caused by the improper performance of duties. The legal entity and the trustee can no longer hold the director liable for the director’s actions if they have granted discharge for the management conducted. The basic principle here is that the general meeting knows what it is discharging the director for and that the discharge is limited to this knowledge.

What is discharge?

Discharge is the termination of a director’s liability to the legal entity. In principle, after discharge has been granted, a legal entity can no longer hold the director liable for the damage the legal entity suffered or may still suffer as a result of the director’s actions – of which the general meeting was aware.

Annual discharge

Discharge is often granted at the annual shareholders’ meeting. Discharge is then granted for the previous fiscal year on the basis of information the director has given to the shareholders’ meeting prior to the discharge resolution, according to established case law.

Final discharge

In addition to discharge at the annual shareholders’ meeting, discharge is also granted upon resignation of a director. Discharge is often granted to the director in such a situation for the entire term of office. However, this is not without consequences. If discharge is granted for the entire term of office, the legal entity and the trustee cannot claim liability of the director on the grounds of improper performance of his duties.

Clear formulation

Pursuant to Dutch law, discharge must be dealt with as a separate agenda item. The mere adoption of the annual accounts does not imply automatic discharge of the directors.

The scope of a discharge resolution depends on the information and documents provided to the general meeting. A discharge resolution does not exceed the information provided to the general meeting of shareholders. In some cases, however, not all the consequences of a director’s actions are known. In such cases, it is wise not to proceed too lightly to grant discharge. The unqualified discharge granted to the director by the general meeting relates to all management activities performed by the director during the period covered by the annual report he has made available to the general meeting.

For a statutory director, it is important to realize that there is no right to be granted discharge. As a result, this cannot be enforced. The director would do well to propose the subject of discharge as an item on the agenda in every convocation for the annual meeting. It is also important to raise this subject in the event of an interim resignation.

Especially in a situation in which a director is dismissed – but also in all other cases –  it is important to formulate the discharge resolution clearly. In this case, the director will have an interest in a full discharge, while the legal entity has an interest in retaining the possibility of holding the director liable if it turns out that the managerial actions left much to be desired. Our advice is therefore to formulate a discharge resolution clearly and carefully and, if necessary, to include a reservation in the discharge resolution so that no discussion will arise over the scope of the discharge.

Exemption

The following exemption applies to the basic principle that a discharge resolution must be granted explicitly. If all shareholders are also directors, signing of the financial statements by all directors also constitutes adoption of the financial statements. This adoption automatically leads to discharge of the directors. A condition is that any other persons with meeting rights have been given the opportunity to take note of the financial statements and have agreed to this manner of adoption. This exemption applies to many  directors and major shareholders (DGAs).

What is not included in the discharge?

A discharge resolution only applies to internal liability, only the legal entity itself and the trustee can no longer hold a director liable. Third parties may still hold the director liable for damage attributable to the director, for example, on the basis of a wrongful act. If the legal entity has gone bankrupt due to improper management, the legal entity and the trustee can hold the director liable despite the discharge granted. Finally, also in the case of fraudulent withdrawals or manipulation of the books by the director the discharge is not valid.

Corporate lawyer

Do you have any questions about discharge or directors’ liability? Or would you like us to deal with a dispute concerning your company? Please do not hesitate to contact us: