External liability
Besides liability towards the company itself, another frequent occurrence is that outsiders involved in the company – e.g. creditors, suppliers, customers, the tax authorities or the Employee Insurance Agency (UWV) – hold a director liable.
This is likewise a complex situation that poses a threat to the director on various counts, such as in the following cases:
• liability at the pre-formation stage of the company;
• direct unlawful acts performed vis-à-vis a third party;
• misrepresenting the company’s position;
• director’s liability in the event of bankruptcy of the company;
• director’s liability in the event of overdue taxes and national insurance contributions.
Liability at the pre-formation stage
If a company is incorporated at the time a business is set up, certain formalities must be observed with respect to this company. For example, the company must be formed by notarial deed, and you have to obtain a “certificate of no objection” from the Ministry of Justice beforehand. The company must be registered with the Chamber of Commerce, and you have to pay up a given minimum capital on the shares in your company.
During this pre-formation stage, i.e. before your business has become a fully-fledged company and all the formalities have been completed, the directors are jointly and severally liable for discharging the company-in-formation’s obligations. This means that the directors can be held liable if the company fails to meet its obligations, even if the directors were not the incorporators, and even if they assumed that they had already been listed as directors in the Commercial Register
If, when incorporating a company, you intend to make use of a company or another legal entity, it is advisable to obtain professional advice on the matter in order to avoid being confronted with unpleasant consequences during or after incorporation. Or maybe you have had dealings with a company-in-formation (such companies have to include the letters ‘B.V. i.o.’ on their company stationery) which has failed to meet its obligations towards you. You need professional advice in such cases as well.
Unlawful acts
Directors can also be held liable if they have directly acted negligent towards third parties. The following cases from practice give you a few striking examples of unlawful acts whereby directors can be held personally liable.
• A director can be held personally liable if he enters into obligations on behalf of the company, despite the fact that he ought to have known that the company would be unable to meet these obligations and has no assets to cover them.
• A director can be held personally liable if he demonstrates unwillingness to pay, or if he makes selective payments, i.e. if he does pay certain creditors while deliberately allowing the debt to one particular creditor to remain outstanding.
• A director can be held personally liable if he induces the company to fail to perform a contract it has concluded, i.e. if the director deliberately enforces breach of contract and thereby causes damage to the company’s counterparty. This applies even if the director did not take personal action, but stood idly by and let the company commit breach of contract. Failure to intervene can also result in personal liability.
Unlawful acts frequently form the basis for directors’ and supervisory directors’ personal liability. This is primarily due to the fact that the action arising from an unlawful act is theoretically open to everyone, provided that the director in question has acted negligently directly towards the person who suffers damage, and the claim is not time-barred.
Other company officers besides directors and supervisory directors can be confronted with liability arising from unlawful acts as well. In particular, shareholders who involve themselves intensively with the policy of the company in which they hold a participating interest, risk being held (jointly) liable for damage suffered by third parties such as creditors. However, one condition here is that the shareholder has acted negligently directly towards the company’s creditors. In this respect, the court verdict on Ceteco clearly shows that shareholders who admittedly know all the ins and outs of the company, but who nevertheless fail to intervene while the company’s capital is structurally eroded, can be held directly liable towards the company’s creditors.
All directors and supervisory directors, as well as shareholders and other parties concerned, may face a claim for liability due to an unlawful act at some stage in their career. If you are a director of a legal entity, it is a good idea to obtain professional advice on the risks and the available options in order to avoid or limit a claim for liability. If you have been held liable, you will need an expert lawyer to conduct proceedings on your behalf.
Or perhaps you yourself have suffered damage as a result of an unlawful act by the director of a legal entity, and you want to recover this damage from the director in question.
Mispresenting the company’s position
Outsiders can suffer damage if a company’s financial position is misrepresented, e.g. if the annual accounts or the annual report contain incorrect information. For instance, outsiders might make unsound investments as a result of the information given in the annual report. An example of this is a shareholder who goes by the annual figures and buys shares that turn out to be worth considerably less later on. Another example is a supplier who thinks he is doing business with a thriving company, but in the end none of his invoices are paid. In such cases, the company’s directors can be held liable for the misleading financial documents and the damage suffered by third parties as a result.
Although the annual accounts are traditionally considered to be a tedious subject, all companies and entrepreneurs still have to deal with them. It is the board of directors’ responsibility to draw up the annual accounts. If something goes wrong, our lawyers at Borsboom & Hamm N.V. can help you. If necessary, they will work on this together with experts in other fields, such as chartered accountants and tax specialists. And if you yourself have relied on a company’s financial documents which have turned out to be incorrect, our lawyers at Borsboom & Hamm N.V. can give you professional advice on various ways in which you can recover your losses.
Liability in the event of bankruptcy of the company (Directors’ Liability Bankruptcy Act, WBF)
Everyone involved in a company naturally hopes that this company will always do well. However, the company may go bankrupt if things do go wrong. Directors and supervisory directors, as well as all (other) persons closely involved in the company’s policy, may be confronted with a claim for liability lodged by the company’s receiver in the event of bankruptcy. In principle, such liability covers the entire negative balance of the insolvent company; this sum can mount up considerably in a very short time. The receiver subjects the conduct of all persons involved in the company for (at least) the three years prior to bankruptcy, to close scrutiny. If it subsequently transpires that a director has failed to perform his duties properly, and that this improper performance was a major cause of the bankruptcy, the receiver will take steps to recover the negative balance of the bankrupt company’s assets from this director. The fact that the directors have been discharged from all liability will not impede the receiver’s own claim for liability.
Everyone can be held responsible, not only (former) directors and supervisory directors but all those at the company who had a substantial “finger in the pie” and who were jointly responsible for determining company policy. These may include shareholders, but they could also be accountants who took far too much upon themselves with respect to company matters. Many people often think that shareholders can never be held liable, but this is untrue. If shareholders have involved themselves too closely with company procedure, there is a real risk that they too can be held liable. The following examples illustrate cases where an individual party might be considered to be a de facto policy-maker:
• Individuals who maintain all contacts with the bank, the accountant and the Tax and Customs Administration;
• Individuals who conclude salary agreements with the company’s employees;
• Individuals who issue instructions to the company’s administrative staff;
• Individuals who concern themselves with taking on and dismissing staff;
• Individuals who negotiate with the company’s (potential) clients;
• Individuals who fill in the turnover tax declarations, report the company’s inability to pay, etc;
• Shareholders who are fully aware of the company’s business circumstances, who have the opportunity to influence the situation through e.g. shareholders’ resolutions, and who must suspect that the company will no longer be able to meet its obligations, yet fail to intervene.
To sum up: the circumstances surrounding each case always determine whether an individual may be considered a de facto policy-maker (and therefore whether he is liable as a director). As a general rule, we can say that the longer and the more intrusive an individual’s involvement in company procedure or company policy is, the more likely it is that he will be held liable if the company goes bankrupt.
Directors, supervisory directors and the de facto policy-makers specified above can be held liable if they are guilty of manifestly improper management of the company.
This is almost always the case in the event of intent and fraud, but they can also be held liable if they are guilty of reckless or irresponsible management of the company. In other words, they must be guilty of manifestly improper management.
Theoretically, the receiver has to prove that manifestly improper management has taken place, and he also has to demonstrate sufficiently that such improper management is a major cause of the bankruptcy. However, the onus of proof may be reversed in certain cases. This means that it is not the receiver who has to prove improper management, but the director who has to prove that the bankruptcy was due to another major cause and not to improper performance. This substantial deterioration of the position of the director held liable may arise in two cases: if the board of directors has failed to fulfil its obligation to keep satisfactory accounts, or if the board has failed to file the annual accounts with the Chamber of Commerce within the specified period, i.e. not later than thirteen months after the end of the financial year. If the board is indeed guilty of these omissions, the characterisation ‘improper management’ must then be regarded as final. In such an event, the only defence the board can put forward is to demonstrate sufficiently that this improper management was not a major cause of the bankruptcy.
A director will not be held liable if he is able to prove that the board’s improper performance cannot be attributed to him, and if he is not found negligent with respect to taking steps to avert the consequences of improper management. In practice, however, this is an extremely tall order requiring a precise analysis of the course of events and expert assistance from a lawyer experienced in conducting proceedings.
Liability in the event of overdue taxes and national insurance contributions (Directors’ Liability Act, WBA)
Directors and de facto policy-makers can also be held liable vis-à-vis the tax authorities in certain cases. This liability can become reality if the company has not paid the statutory taxes and national insurance contributions, and if such directors or de facto policy-makers are guilty of manifestly improper management.
If a company is unable to pay the statutory taxes and national insurance contributions within the specified period, it must immediately report this inability to pay to the tax authorities. Similarly, the company must immediately report any inability to pay its employed persons’ insurance schemes contributions within the specified period to the Employee Insurance Agency (UWV). If the company is unable to pay compulsory contributions for participation in a company pension fund, this must also be reported to the relevant pension fund. Reporting inability to pay to one of these authorities does not count as reporting to all the others, although many people think it does. The company must therefore inform each of the relevant authorities separately of its inability to pay. This can be done orally or in writing, provided the company makes it clear what taxes or contributions are involved and why it is unable to pay them. A notification form for reporting inability to pay can be obtained from the implementing bodies.
If a company immediately informs the tax authorities, the UWV and the pension fund as soon as it becomes aware that it is unable to pay the relevant taxes, national insurance contributions, employed persons’ insurance schemes contributions or pension contributions, this makes it more difficult for all the above authorities to hold directors personally liable. It is then up to the tax authorities, the UWV or the pension fund to prove that non-payment of the relevant taxes and contributions is due to manifestly improper management for a period of three years prior to the company’s informing the relevant authorities of its inability to pay, while such improper management must be attributable to the director in question. For an explanation of the term ‘improper management’, please see the examples given under WBF. If the company has failed to report its inability to pay, or failed to do so in the correct manner, e.g. if some of the data is missing, the implementing body may then assume that the company has been improperly managed. In such cases, it is much more difficult for the relevant director to avoid a claim for liability.
In some cases, it may be in the interests of the director as well as those of the tax authorities or the UWV to refrain from instituting liability proceedings against this director. This is because the question of whether a director is liable is not that simple in many cases. Extensive investigations are often necessary in order to establish clearly where the faults lie and who is liable for these faults. This means that settlements are frequently effected with the implementing body, whereby the director is only obliged to pay part of the amount owing and is released from the remainder of his liability towards the relevant body. The advantage of a settlement is that this does not involve the costs, trouble and risks attaching to court proceedings.