Let’s say you’re a co-founder or (supervisory) board member of this exciting new start-up and things are moving really fast. You’re an excellent networker with a great product and you’re raising capital for the next investment round. You’re going from start-up to scale up. You’re focusing on growth and sales and you don’t have time to deal with a lot of red tape and formalities.
Red tape and formalities matter
You may have the right intentions, but do you realize that you can be held liable towards the company and/or third parties under certain circumstances? And, not to forget, that you can be discharged from liability towards the company in a straightforward process?
Discharge from liability
Discharge is a resolution of the company’s general meeting. If this resolution is adopted, you are basically released from liability towards the company. In other words: by adoption of the resolution the (supervisory) directors are discharged for the (performed) management or supervision. The discharge relates to specific period, usually the previous financial year. Once this resolution is adopted, you can as a general rule no longer be held liable for shortcomings in the period for which discharge was granted.
It is important to note that discharge from liability only has internal effect. Given the previous, the discharge cannot be seen as an indemnification against claims of third parties. This basically means that for example trade creditors, banks and the tax authorities may disregard the discharge.
Joint and several liability
And what’s more we’re talking about joint and several liability here. This means that you and your fellow board members are in principle collectively responsible for the performance of management or supervisory duties. You may therefore be held liable towards the company if other (supervisory) board members don’t fulfil their duties properly. This might even be the case if tasks are divided between board members, as certain matters (e.g. financial and general policy) are considered a joint responsibility.
Given the above, it should be clear that discharge should be on your radar and that it is put on the agenda of the general meeting each year.
Who, where, when?
As mentioned above, the general meeting may discharge its (supervisory) board members from liability towards the company. In addition, discharge could also be granted in case of resignation of a (supervisory) board member. In such case, it is important to document that the discharge is granted as per the date of the resignation.
It is furthermore important to realize that discharge may be granted to the (supervisory) board in full or to their members individually. To prevent any uncertainties, it is recommendable to point out to who the discharge actually applies.
Discharge from liability may be granted by the general meeting, but please note that it is not obliged to do so. It is customary that discharges are granted at the annual general meeting (AGM), but please check whether the discharge of (supervisory) board members is included as a separate agenda item. The discharge will only release you from liability for your actions insofar as evidenced by the financial statements and/or if discussed at the general meeting. Transparency and documentation (meeting minutes) are therefore important. We would like to stress that the mere adoption of annual accounts does – as a general rule – not imply a discharge.
Residual liability risks
Once the general meeting has granted you discharge as a (supervisory) board member, the company will – in principle – no longer be able to hold you liable, even in the event of (seriously) culpable conduct. We note that certain liability risks still apply, even if discharge has been granted (a discharge could for example resolution be annulled under certain circumstances).
To avoid liability, (supervisory) board members often take out a directors’ liability insurance (D&O insurance). A major advantage of a such insurance is that it covers both internal and external liability. In this respect, it’s also worth mentioning that the D&O insurance often covers legal (defense) costs against claims filed.
Get a grip on governance with Govin
We hope that we’ve been able to convince you how important it is to ensure that you’re discharged from liability for your management or supervision each year. Fortunately, at Govin, we’ve developed a tool that can help you get a grip on corporate governance issues: the Govin Corporate Governance Platform. Our corporate governance platform will guide you step-by-step through the discharge from liability process and other extremely important governance issues.
For more information or a demo, contract:
+31 6 27 09 49 67