Internal liability
This page gives an overview of the various types of liability that directors of legal-entity companies face if they fail to perform their duties properly. Liability towards a legal entity may occur in the event of bankruptcy as well as outside it. In all such cases, the company suffers damage for which the director is held personally liable. This situation often arises if shareholders are unable to agree with the course of action pursued by the director, following which the relevant director is removed and his successor examines the policy pursued in minute detail. This kind of change in management may even result in directors being confronted with claims for liability many years after their departure.
Proper performance of duties
Each director of a legal-entity company must perform his duties properly. This means that he must act in a meticulous and conscientious manner as well as in the interests of the company. If a director fails to do this, and if he acts improperly, the company can hold this director liable for the damage it suffers in consequence. The question of what constitutes improper performance on the part of a director is a complex one and requires expert analysis. Each case must be individually examined by a specialised lawyer in order to define the boundary between proper and improper performance. This is because the court will have to answer this question too, and liability depends on the court’s response.
Liability may arise if a director cooperates in making a distribution to the shareholders, for instance, despite the fact that the company is doing (very) badly in a financial sense. In such cases, this erodes the company’s capital and the director of this company can be held liable in that respect. Erroneous corporate decisions, such as making totally unprofitable investments, can also result in the relevant director being confronted with liability. Frequent cases of liability also occur in enterprises where the director is the major shareholder as well, and where this director sells the company’s assets – to himself or to a company with which he is on good terms – against the wishes of the minority shareholders. The recent case resulting from Ceteco’s bankruptcy in 2000 once again made it clear that directors and supervisory directors who know exactly what they are doing, yet still fail to intervene even when it is obvious that the company’s internal organisation can no longer cope with its volume, will be held liable if things subsequently go wrong. These are all examples of improper performance.
If the board of directors makes mistakes, all the members of that board are liable. No individual member can escape liability by shifting the blame on to another individual member. In principle, each member of a board is responsible for the whole, even if he himself was not present when the wrong decisions were made. Nor can a board member escape liability (in principle) by claiming that he did not have the necessary knowledge or skills. All those who are on the board of a company must perform their entire management duties in a proper and professional manner. They must act exclusively in the interests of the company, and may not take their own personal interests into consideration while so doing.
In view of these risks, it is important that you obtain prior advice from an expert on the consequences attaching to your acceptance of a post as director. You should also obtain professional advice if you yourself want to hold a director liable. Our lawyers will fully investigate the relevant director’s personal history and conduct, in order to give you the opportunity to assess the chances of success if you decide to file a claim for liability.
Mismanagement of the company can lead to a court inquiry!
If a director or other officer commits errors, this may lead to other consequences besides liability. There is a specialised court in the Netherlands – the Enterprise Section of the Amsterdam Court of Appeal – whose task is to conduct investigations into companies suspected of pursuing an incorrect policy. This investigation is known as an inquiry, and a number of parties may request the court to hold such inquiries, including shareholders, trade unions and receivers. The right to institute an inquiry is often given a great deal of publicity. Indeed, large-scale inquiries at ABN AMRO Bank, the HBG dredging company, and the Rodamco property fund caused quite a stir in the past. An inquiry is an effective and frequently-used means of obtaining openness, sorting matters out, and rationalising strained relations within a company. This not only applies to listed companies but to medium-sized companies and SMEs in particular.
Parties may request an inquiry if there is doubt whether the right policy is being pursued within a given company. For example, an inquiry may be requested if decision-making has reached a deadlock. This deadlock may arise as a result of a conflict between directors which cannot be resolved. In addition, an inquiry may often be instituted if information is being withheld from minority shareholders, or if the state of affairs is not sufficiently disclosed in the event of a suspected conflict between directors’ personal interests and the interests of the company.
If it emerges from the inquiry that there are valid reasons for doubting the correctness of the policy, the Enterprise Section can immediately take all manner of steps to restore order within the company. For instance, the Enterprise Section can suspend directors or supervisory directors, or refuse shareholders access to meetings, or appoint an independent third party if the matter really cannot be resolved by those concerned. If further rationalisation is necessary even after these immediate steps have been taken, the Enterprise Section can take radical measures such as removing directors or supervisory directors from office or temporarily transferring shares to an independent third party. In the most extreme cases it can even dissolve the company.
During the past years, the right to institute an inquiry has attracted a tremendous amount of interest from people involved in all kinds of companies. At Borsboom & Hamm N.V., our lawyers can provide you with professional assistance in this field during the advisory phase as well as during proceedings at the Enterprise Section. They will assist you regardless of whether you yourself are an entrepreneur confronted with a request for an inquiry against you, or whether you are a shareholder and want to request an inquiry into a certain company. Carl Hamm, specialises in the right to institute inquiries and has conducted proceedings at the Enterprise Section on behalf of as well as against companies. Our expert lawyers at Borsboom & Hamm N.V. will be happy to advise you on this matter.
Liability for incorrectly performed corporate legal acts
In addition to the types of liability specified above, there are various kinds of liability concerning acts incorrectly performed by the company. For example, a public or private limited company may only redeem its own shares under certain circumstances, and distribution may only be effected if the company’s equity capital still remains above a certain minimum level after such distribution is made. Moreover, a company may never acquire more than a certain maximum number of its own shares; this prevents the company’s capital from being eroded. If the director fails to comply with these conditions, and still cooperates in the redemption of the company’s own shares or the effecting of distributions, he can be held liable for all damage arising from his actions.
This is why it is extremely important that you seek professional advice beforehand with respect to whether such acts may be performed at your company. Or perhaps you are a shareholder and have discovered that a company you have done business with has illegally purchased your shares, or has failed to make a distribution in the correct manner, and you have suffered damage as a result.