Five takeaways to reduce your liability risk as a board member

Are you a (non-)executive director or supervisory board member? Or are you de facto acting as such? The liabilities associated with these functions are a blind spot for many investment professionals. Liability claims may pose serious risks to your reputation, business & (personal) assets, and in this blog post, we briefly explain some details and suggest ways to avoid liability.

Key takeaways

1. Acting as a statutory director (even without formally being one) may trigger liability risks;
2. Mandatory yet often overlooked actions, like (on time) filing of the annual accounts, may lurk liability;
3. Management duties are a collective responsibility;
4. Discharge helps but does not answer all questions;
5. Govin can help you reduce liability risks and ensures good governance, while saving time and reducing costs.

Liability

In this post, we distinguish two forms of directors’ liability:

1. The liability of directors towards the company (also known as the “internal liability”); and
2. The liability of directors towards third parties (often called “external liability”).

Image 1: Directors’ liability overview For ease of reference, we use the term directors’ liability here to refer to the liability of both executive and non-executive directors, as well as supervisory board members and de facto directors. However, please note that in practice differences exist between those functions.

Internal liability

The managing directors are collectively responsible for the general affairs of the company, e.g. day-to-day management, determination of the policy and the execution thereof. Additionally, each of the directors is responsible for the proper performance of its (allocated) tasks and duties. In case of alleged mismanagement, each of the board members is liable in full, unless board members can prove that the mismanagement was not attributable to her (or him) and that she (or he) was not negligent in acting to prevent its consequences. In some cases, it may even be necessary to resign as director in order to avert liability. Examples of improper management include:

1. acting in contrary to the rules included the Articles of Association or other legal documents (e.g., Shareholders’ Agreement);
2. taking (unnecessary) financial risks without thorough preparations or securities;
3. withdrawing assets of the company for private purposes;
4. refraining from concluding customary insurances; and
5. seizing corporate opportunities or competing with the legal entity.

Examples 1 and 2 are illustrative examples of frustrating paperwork that usually is neglected until it is too late. A clear understanding of a company’s rules, including the Articles of Association and Shareholders’ Agreement, obviously helps directors to remain in control and to avoid liability.

External liability

Directors can also be liable to third parties (e.g. third parties, such as creditors) in case of serious culpability. This liability can be established upon various grounds, but generally only becomes manifest in case of bankruptcy of the company (e.g. shortfall of assets or unpaid taxes). Examples of the above are as follows:

1. In the event of a bankruptcy, the bankruptcy trustee will review whether the annual accounts of the company have been filed in a timely manner and/or whether the directors fulfilled their bookkeeping duties during the years prior to the bankruptcy. If this is not the case, Dutch law presumes that the directors’ duties have been fulfilled improperly and must have been a major factor that contributed to the bankruptcy, thus significantly increasing the risk of liability for the deficit;
2. A director may be liable for a deficit if she (or he) entered into a contract, or agreed to a distribution of profit, whilst the director knew or could reasonably have known that the company could no longer meet its financial obligations within a reasonable timeframe and would not offer (sufficient) recourse; and
3. Directors may be liable for unpaid taxes (unless notified timely).

Reducing your liability risk with ease

The above shows that liabilities are easily triggered. Let’s zoom in on how Govin can reduce your liability risks without hassle.

Making legal documentation simple

Having a detailed understanding of the constitutional documents (articles of association and shareholders’ agreement, etc.) is crucial in good governance. But these documents are unstructured and complex, especially for people without a legal background. Govin provides insight into essential governance processes (e.g. resolution management) via its platform and categorizes the constitutional documents on a “per clause” basis, which helps investors and founders to make informed decisions, be compliant and confident in a matter of clicks.

Automated paper trail for governance

By centralizing all governance data and workflows, the platform offers a paper trail enabling directors to prove that companies are in good standing. No more endless searching in your inbox for resolutions and approvals from months or even years ago. Or WhatsApp messages, or even phone calls. None of that.

Automated corporate housekeeping

Everyone knows that your corporate housekeeping (such as annual accounts filing overview – because of liability) is important, yet it is usually not one’s top priority. Simply share the legal documentation of your portfolio with us, we do the rest. Govin automatically checks and sends out periodic updates so you are always on top of your compliance. Additionally, Govin also monitors your Directors & Officers insurance. Do you want to reduce your liability while saving time and costs? Let’s discuss further.

Contact information

Jesse Grift jesse@govin.co +31 6 81 01 84 84

Wordlist

Discharge

Discharge basically means that directors are released from liability. This decision is being made by the general meeting. Board members often do not realize that the scope of the discharge is limited. This is because the discharge will only release board members from liability vis-à-vis the company (i.e. release from internal liability). The previous implies that third parties, such as creditors, may disregard the discharge. It should furthermore be observed that the scope of the discharge is limited, as its scope is limited to the information as evidenced in the annual accounts and/or details that have been discussed at the general meeting.