De facto directors

A de facto director is a person who, without being officially appointed as a company director, exercises de facto management and decision-making powers. A de facto director is involved in the management of the company and takes management decisions, without a legal or contractual basis for doing so and without the authorisation of the competent corporate organ.

In the absence of a definition for a de facto director in the Company Code, reference should be made to the case law and literature. In this regard, the following cumulative criteria must be met in order for a person to be considered a de facto director:  

  • The person is involved in the company's management without a statutory or contractual basis for such involvement

Shareholders of a (portfolio) company should be aware that if they are involved in the company's management without a statutory or contractual basis for doing so, they may be deemed de facto directors and be held liable accordingly. When the company's shareholders are involved in the decision-making process, i.e. when shareholder approval is required for important management decisions, the shareholders could be considered de facto directors. The same holds true for members of a holding company's executive board when, pursuant to the rules of procedure, certain decisions in the portfolio company are made contingent on the approval of (a member of) the holding company's executive board.

  •  The person directly performs certain positive acts, in particular acts of administration

Failure to act does not give rise to liability as a de facto director. Indeed, the Belgian courts interpret the concept of ade facto director narrowly and consider that the mere exercise of influence on a management decision - without a positive act - does not result in a de facto directorship. Caution is, however, recommended. According to some scholars, it suffices for a person to impose his or her will on the directors, so that the latter no longer have sufficient autonomy to take an independent decision, in order to qualify as a de facto director. 

Supervision, monitoring and the provision of advice or technical support are not considered positive acts of administration and therefore do not give rise to a de facto directorship . Indeed, such activities are in practice regularly performed by shareholders, credit providers and (financial) investors such as private equity funds.  

In the well-known Boddart Fittings case, the Brussels Court of Appeal rejected a liability claim against the Belgian state based on allegations that the government had acted as a de facto director. The Belgian state (through an investment fund) had provided credit to a company. In return, it requested, amongst other things, that the company appoint a crisis manager. Following the company's bankruptcy, it was claimed that the Belgian state should be held liable as a de facto director. The court of appeal rejected this claim on the ground that, as an investor, the Belgian state had the right to monitor the company and noted that the crisis manager had an employment contract with the company. In addition, it found that the crisis manager had carried out his tasks with complete independence and autonomy from the Belgian state and that, consequently, the Belgian state had not performed any positive acts of administration.  

  • The person performs acts of administration normally reserved to the company's directors  
  • The person acts with complete independence and sovereignty with regard to the company and not further to an assignment bestowed on him or her by the company 

An employee of the company (or of the parent company) cannot be considered a de facto director since an employee does not have the requisite degree of independence. Again, the abovementioned Boddart Fittings case should be borne in mind. Caution for simulation is, however, necessary. Sham (employment) contracts will of course not be sufficient to exclude recharacterisation as a de facto director.  

Potential liability of de facto directors

De facto directors can be held liable in the same way as regular company directors, on the grounds summarised below.  

It is, however, generally accepted that de facto directors cannot be held liable by the company for ordinary management errors within the meaning of Article 527 of the Company Code. In principle,[1] de facto directors can also not be held liable by the company or third parties for violations of the Company Code or the company's articles of association, pursuant to Article 528 of the Company Code.   

It is also important to note that directors cannot hide behind the liability of de facto directors. Indeed, the directors cannot avoid liability by arguing that their duties were merely pro forma and that the company was actually run by one or more de facto directors.  

Liability in the event of bankruptcy

Liability for the company's debts

Pursuant to Article 530 §1 of the Company Code, in the event of bankruptcy, de facto directors can be held personally and jointly liable with the company's directors, former directors and any other persons with decision-making authority by the trustee in bankruptcy or unsatisfied creditors for certain of the company's debts (i.e. all or a portion of the debts in excess of the assets of the company in liquidation), if manifest gross negligence on the part of the de facto directors which contributed to the bankruptcy can be proven.  

All forms of serious tax fraud, whether organised or not, within the meaning of Article 5 §3 of the Act of 11 January 1993 on the prevention of the use of the financial system for the purposes of money laundering and the financing of terrorism, are considered manifest gross negligence. 

Social security contributions

Pursuant to Article 530 §2 of the Company Code, de facto directors can be held liable for unpaid social security contributions and penalties. The National Social Security Office (ONSS) and the trustee in bankruptcy may lodge a claim with the bankruptcy court to have the directors, former directors and de facto directors declared personally and jointly liable for social security contributions, penalties, late payment interest and a so-called "fixed contribution".[2]

Such liability will be triggered if either of the following conditions is met: (i) the director or de facto director clearly acted in a grossly negligent manner leading to the bankruptcy of the company or (ii) over the five-year period immediately preceding the bankruptcy, the director or de facto director was involved in two or more other bankruptcies, liquidations or similar situations in which social security contributions were not paid.

Gross negligence shall be presumed (i) in the case of serious tax fraud, whether organised or not, within the meaning of Article 5 §3 of the Act of 11 January 1993 on the prevention of the use of the financial system for the purposes of money laundering and the financing of terrorism and (ii) when the company has been managed by a director or other person who has been involved in two or more other bankruptcies, liquidations or similar situations in which social security contributions remained unpaid.

Liability outside of bankruptcy 

Tort liability

A de facto director may be held liable to the company and to third parties pursuant to general principles of tort law (in accordance with Article 1382 of the Civil Code). In this case, the de facto director shall be responsible for making good any extra-contractual damage.  

Tax liability

Regardless of whether the company declares bankruptcy, its director(s) and de facto director(s) can be held jointly liable for the payment of certain taxes, in particular advance personal income tax (bedrijfsvoorheffing / précompte professional) (Article 442quater Income Tax Code) and value added tax (Article 93undecies C VAT Code), if as a result of a tort committed by the director or de facto director the taxes were not paid as and when due.

Criminal liability

Pursuant to Article 492bis of the Criminal Code, a director (or other person who exercises de jure or de factomanagerial powers within a company) who fraudulently and for his or her own direct or indirect purposes uses the company's assets or credit, knowing this to be significantly detrimental to the financial interests of the company, its shareholders or creditors, may be sentenced to a prison term, ordered to pay a fine or deprived of certain rights (e.g. the right to hold public office). 

Conclusion 

Shareholders, credit providers and investors, such as private equity funds, have a right to monitor and provide advice or technical support to (portfolio) companies without being considered de facto directors. It is, however, important to abide by the rules and procedures provided for by the Company Code. A de facto director can be held liable on a number of different grounds, as if that person had been officially appointed as a company director. Consequently, a person who wishes to exercise de facto management and decision-making powers, rather than merely monitoring, influencing or rendering advice to a (portfolio) company, should be validly appointed as a director.

It is possible to remedy or mitigate the financial consequences of directors' liability. For example, such liability can be covered by D&O insurance taken out by the directors or the holding companies at group level or the (portfolio) companies. Certain D&O insurance policies also cover de facto directors. In place of, but mostly in addition to D&O insurance, a director can also benefit from a hold harmless commitment, i.e. a commitment by a person or entity (such as a shareholder, holding company, portfolio company, etc.) to hold the director harmless and assume the financial consequences of third-party claims.