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
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- Acting as a statutory director (even without formally being one) may trigger liability risks;
- Mandatory yet often overlooked actions, like (on time) filing of the annual accounts, may lurk liability;
- Management duties are a collective responsibility;
- Discharge helps but does not answer all questions;
- 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:-
- The liability of directors towards the company (also known as the “internal liability”); and
- The liability of directors towards third parties (often called “external liability”).
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:-
- acting in contrary to the rules included the Articles of Association or other legal documents (e.g., Shareholders’ Agreement);
- taking (unnecessary) financial risks without thorough preparations or securities;
- withdrawing assets of the company for private purposes;
- refraining from concluding customary insurances; and
- seizing corporate opportunities or competing with the legal entity.
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:-
- 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;
- 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
- Directors may be liable for unpaid taxes (unless notified timely).