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Director and parent company liability

Liability

Under what circumstances can a director or parent company be held liable for a company’s insolvency?

As a rule, directors are not personally liable under Dutch corporate or insolvency law for the debts of a limited liability company or a Dutch public limited company. In general, director’s liability arises only if a serious personal fault can be attributed to him or her. 

Dutch corporate law allows directors wide discretion in how they fulfil their responsibilities. Even if a director takes a decision that (in retrospect) proves to have negative consequences for the company or its creditors, the starting point remains that the director is not personally liable. 

Dutch law draws a rough distinction between liability to:

  • the company under corporate law (ie, internal liability);
  • the bankruptcy estate under insolvency law; and
  • the company’s creditors under tort law (ie, external liability). 

Internal liability may arise if the directors fail to fulfil their fiduciary duties. Only the company or its bankruptcy trustee can bring actions on this ground. Violations of corporate rules (eg, the company's articles of association) are deemed to be improper management.

Upon bankruptcy, the bankruptcy trustee can hold directors personally liable for the estate’s deficit if they have performed their duties as directors in an inappropriate manner for a three-year period preceding the bankruptcy. The trustee must prove that the inappropriate fulfilment of the director’s duties was an important cause of the company’s bankruptcy. That said, statutory presumptions to lessen the trustee’s burden of proof apply if the board of directors has failed to conduct a proper administration or properly deposit the company’s annual accounts in accordance with statutory requirements. In those cases, the directors are irrefutably deemed to have performed their duties improperly and a statutory presumption applies that the improper performance of duties was an important cause of the bankruptcy. The latter presumption may be rebutted if the directors can prove that other external causes for the company’s bankruptcy exist.  

Finally, directors may be liable towards the company’s creditors under tort law. In contrast to a number of other jurisdictions, directors of a distressed Dutch company are not explicitly obliged to file for insolvency at a given moment as a result of not meeting a certain liquidity or equity test. However, a director may be personally liable towards the company’s creditors if he or she enters into obligations knowing, or having sufficient reason to know, that the company would be unable to fulfil those obligations and has insufficient assets against which the deprived creditor could take recourse.

Shareholders are generally not liable for debts incurred by the company. However, a shareholder that has determined the policy or predominantly participated in determining the company’s policy may be regarded as a shadow director and held liable on the same basis as a director.

A shareholder (including its directors, as the case may be) may face liability towards the creditors of its subsidiaries only under specific circumstances. In order for a shareholder’s duty of care towards the company to be established, the shareholder must:

  • have control over the company (ie, be a majority shareholder or at least have a similar position);
  • be intensively involved in the company’s business; and
  • have insight into the financial position of its subsidiary. 

Defences

What defences are available to a liable director or parent company?

Directors' liability towards creditors can be mitigated by informing prospective counterparties of the company's financial position and the risk that the company will be unable to meet its obligations. If a counterparty nevertheless decides to enter into an agreement with the company, there will be, as a rule, no grounds for directors' liability under tort law.

The general shareholders’ meeting may discharge a director or the board of directors at the end of the book year on acceptance of the annual accounts. Such a discharge may prevent internal liability for the matters set out in the annual accounts, but does not apply to facts that were not disclosed in the annual accounts. The company or its bankruptcy trustee may invalidate the discharge decision if it is incompatible with the overriding principles of reasonableness and fairness under Dutch corporate law.

For any insolvency-specific liability claims brought by the trustee against a director, a possible defence is that even if the board of directors mismanaged the company, such mismanagement did not cause, or at least was not the main cause of, the company’s bankruptcy. If the directors can prove that other circumstances (eg, the economic situation) caused the bankruptcy, they will not be held liable. The discharge of a director will not prevent liability towards the bankruptcy estate. 

Due diligence

What due diligence should be conducted to limit liability?

In order to prevent statutory presumptions of mismanagement in bankruptcy, it is important to deposit the annual accounts in accordance with statutory requirements and keep the books and records of the company is such a way that its assets and liabilities can be assessed at all times.

Tort liability towards creditors can be mitigated by duly documenting the assumptions made by the directors when entering into new obligations. In case of financial hardship, it is advisable to provide for a well-documented and substantiated business plan – for instance, by means of a continued liquidity forecast with at least an 18-month horizon. Such documentation will help to demonstrate that, on the basis of the fair presumptions of the directors made at the time of entering into the new obligations, they did not know, or had no reason to believe, that the company would be unable to fulfil the obligations.

Managing directors should refrain from making dividend payments or other distributions to the company’s shareholders if they reasonably know or ought to foresee that the company will be unable to pay its due and collectable debts after that distribution.

To prevent personal liability for certain taxes and social security contributions, directors should, within two weeks of the due date, inform the relevant authorities of the debtor's inability to fulfil its obligations. Failure to do so may result in the directors being held jointly and severally liable for the taxes and social security payments. 

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