- The rules regarding liability that apply to a company’s executive board also apply to the company’s supervisory board (in Dutch: Raad van Commissarissen or RvC). However, in this case, the rules regarding liability apply to their supervisory duties. The provisions that apply to the executive board (also see: here) have also been declared applicable to the manner in which the supervisory board performs its duties
- This means that supervisory board members (i.e., supervisory directors) are liable vis-à-vis the company if they do not fulfill their supervisory duties properly
- In the event of bankruptcy, supervisory directors can be held liable for a deficit if they have not fulfilled their supervisory duties properly
- Finally, supervisory directors can be held liable for damage suffered by a third party in the event of a misleading representation in the published annual accounts or if they have acted unlawfully in another manner vis-à-vis a third party
In all cases, the threshold for liability is high: it must be the case that this concerns serious personal culpability and manifest improper fulfillment of supervisory duties. Moreover, a supervisory director can avert liability by demonstrating that he/she is not to blame for the inadequate supervision and that he/she has not been negligent in taking measures; this is referred to as the ‘exculpatory defense. Govin gives you the controls that you require; additionally, Govin also monitors your D&O insurance. Do you want to reduce your liability while saving time and costs? Reach out to Govin to learn more about your liabilities and how to demonstrate that you are in control.
When does Internal liability arise?
It is the supervisory board’s duty to supervise the executive board and the general course of business in the company/organization. A supervisory director can be held personally liable if he/she has manifestly fulfilled his/her supervisory duties improperly, and he/she can be deemed seriously culpable. It is regarded as manifestly improper fulfillment of duties when no reasonable supervisory director would have acted in such a manner in the same circumstances.
Acting contrary to the articles of association, regulations, or a sector/company code of conduct are important ground for liability. In particular, when these rules are intended to prevent the occurrence of the risk or damage in question.
Joint and several liability
The point of departure is that all members of a supervisory board are liable when the supervisory board has not fulfilled its supervisory duties properly. This means that every supervisory board member can be held liable for the total amount of damage.
A supervisory board member is not liable if he/she cannot be deemed seriously culpable and he/she has not been negligent in taking measures to avert the consequences of improper supervision. He/she will have to demonstrate that himself/herself.
When can a supervisory director be held liable for a deficit in the event of bankruptcy?
The norm for liability for improper supervision in the event of bankruptcy is comparable to the internal director’s liability for improper supervision. A bankruptcy trustee often invokes both provisions. It must first be demonstrated that improper management has taken place before improper supervision can be established.
When it is plausible that improper supervision was an important factor in the bankruptcy, each supervisory director is liable for the whole bankruptcy deficit. This, as far as an exculpatory defense, was not successful.
Record keeping obligation
As is the case for executive board members, a presumption of evidence applies in this case. When the company’s financial administration is inadequate, or the annual accounts have not been filed timely, then improper management/supervision is established, and it is presumed that this was an important cause of the bankruptcy (see our latest blog about Annual Accounts filing). The supervisory board itself is not responsible for the financial administration, but it must supervise that the executive board fulfills its financial administration/record-keeping obligation.
For the financial administration/record-keeping obligation as well as for other important matters in connection with the business operations, the supervisory director is dependent on the information provided by the executive board. However, this does not mean that the supervisory director can just sit back. Supervisory directors are expected to take a proactive approach, certainly where this concerns important topics such as finance and, for example, risk management and control. When there is a reason for this, he/she must request additional information, provide advice to the executive board and also take measures if necessary. This could constitute, for example, the suspension of an executive director.
When does liability vis-à-vis third parties arise?
Under certain circumstances, the supervisory board or a supervisory director can be held liable for the damage that a third party suffers as a consequence of his/her unlawful acts. For example, when this third party has relied on a misleading representation of the company’s state of affairs in the filed annual accounts, this has resulted in damage. The threshold is also high for liability vis-à-vis third parties, and the supervisory director must also be deemed seriously culpable.
Other liability issues
When a supervisory director performs executive duties, any possible liability will be assessed according to the norm that applies to executive board members. In general, the performance of executive duties will lead to liability sooner than the performance of supervisory duties. It is also (theoretically) possible that someone who is not a supervisory director but who has acted in such a manner can be held liable for improper supervision. However, such a ‘pseudo’ supervisory director being comparable to an ‘actual’ executive board member is exceptional.
In view of the increased risk of being held liable as a supervisory director, many companies, but also associations and foundations, conclude directors’ liability insurance for supervisory and executive board members. This insurance not only reimburses damage claims but also covers the costs of defense against such claims (with the exception of intentional fraud, etc.).
Govin acts as a secure repository for all key legal documents as well as accurate resolutions made in line with the documents and regulations. Reach out to Govin to learn more about how you stay in control of your obligations as a Supervisory Board Member and ultimately reducing your personal liabilities.