7 February 2019
Even though companies have separate legal personalities, under Dutch corporate law managing directors may be held liable towards creditors next to the company. This article provides an overview on when and how creditors can hold managing directors liable, and how the managing directors can defend themselves in any liability proceedings.
Who can be held liable as a managing director?
Under Dutch corporate law a managing director can be a natural or a legal person. In the latter case the managing director of the legal person that acts as the managing director of another company can be jointly and severally liable. Furthermore, individuals who were not elected or appointed by the shareholders' meeting or the supervisory board but still participated in determining the company's policy (de facto managing directors) can also fall under the scope of directors' liability. In practice, supervisory directors, sole shareholders and members of the executive committee, not part of the statutory management board may all be regarded de facto directors, depending on their actual involvement.
What can the creditors hold the managing directors liable for?
Managing directors' external liability towards creditors may arise when creditors suffer losses as a result of (i) a misleading presentation of the company's financial position whether in the annual accounts or in the interim accounts; (ii) publishing misleading statements concerning goods or services offered by the company for instance in advertisement or in prospectus; or (iii) the managing director committing a separate wrongful act (tort).
The managing director could be held liable for a wrongful act if he acted in his capacity of the company's managing director and his act constituted a serious fault for which he is personally to blame. A managing director can for example be found liable if (i) he undertook an obligation on behalf of the company while he knew or should have known that the company would not be able to carry out such obligation in accordance with the contract; (ii) he participated in the non-payment of outstanding amounts and preferential payments or in the diminishment of company's assets; or (iii) creditors were refused to be paid despite of the company's solvency.
What can the creditors demand from the managing directors?
The creditors are entitled to full compensation of the losses suffered that are caused by the unlawful act by the managing director, which includes: (i) financial losses; (ii) material damages; (iii) loss of profit; and (iv) reasonable costs spent to limit or prevent losses, to evaluate the liability and the losses and/or to reach extrajudicial settlement.
How can the creditors hold the managing directors liable?
The creditors can initiate a civil legal proceedings against the managing directors before the competent Dutch court. Although the law does not determine a certain period within which the judicial procedure must be initiated, the creditors must always take into consideration the lapse period, generally five years from the date the creditor has become aware of the potential liability claim and the losses suffered.
If the legal basis of the creditors' claim is (i) the misleading presentation of the company's financial position; or (ii) the misleading statements concerning the company's goods or services, it may be considered to initiate the legal proceedings against all of the managing directors as in these cases they are in principle jointly and severally liable towards third persons. On the contrary, if the creditors base their claims on tort, then the legal proceedings in principle can be initiated only against the managing director who was actually involved in the wrongful act.
How can the managing director exempt himself from liability?
If the managing directors' liability is based on either (i) a misleading presentation of the company's financial position; or (ii) a misleading statements concerning the company's goods or services, the managing directors can exonerate themselves by proving that the act or omission is not attributable to themselves and that they have not failed to take measures to avert the consequences of such act or omission. Relevant questions in this regard are whether: (i) the managing directors' tasks/responsibilities were clearly defined and not the responsibility of all managing directors; (ii) the issue has been discussed with the other managing directors; (iii) there was any reason to doubt the accuracy of the information provided regarding the issue; and (iv) the issue was of major importance to the company.
On the other hand, if the legal basis of the creditors' claim is tort, then the managing director could argue that (i) his behavior was not clearly negligent; or (ii) he did not foresee nor reasonably could have foreseen the harm the creditors had to suffer.
A discharge previously granted by the general meeting of the shareholders of the company cannot exempt the managing directors from their liability towards creditors.
How can the managing directors limit the financial consequences of their liability?
Adequate protection against the financial consequences of liability includes: (i) insurance; and/or (ii) indemnification. Even though the majority of insurance policies does not cover all claims (e.g. claims regarding fraudulent and dishonest conduct or known claims) in general a liability insurance still offers the best protection.
The managing directors could be also indemnified by the company for claims brought against them by creditors. It is generally assumed that such indemnity agreement is valid and enforceable provided that it does not cover damages caused by willful misconduct or gross negligence on the part of the managing director. We note, however, that creditors will likely only claim against directors if the company does not provide recourse. In that scenario the value of the indemnification by the company may be limited.