Under Dutch law, there is a high threshold for holding company directors personally liable. As long as a director is acting in that capacity, serious culpability (as opposed to merely ordinary culpability) is generally required. The high threshold is intended to prevent directors from being overly influenced by defensive considerations and applies to both their internal liability to the company and their external liability to third parties, such as individual shareholders or creditors. The Supreme Court has recently reaffirmed this rule and refined the judgment it gave in the 2012 "Spanish Villa" case (ECLI:NL:HR:2012:BX5881).
In two new decisions, the Supreme Court ruled on a director's personal liability to a creditor. The factual situations were different but the message is the same:
"[…] the standard that must be met to hold a director personally liable alongside the company is higher than the standard that applies generally. A high threshold for the personal liability of a director to a third party is justified by the fact that, in relation to the third party, the company's liability is primary and by the public interest served by preventing directors from being driven to an undesirable degree by defensive considerations."
In the first case, which was decided by the Supreme Court on 5 September, the director of company X had been acting on behalf of that company as an intermediary. In that capacity, he acted in contravention of his client's payment instructions and the client incurred damage as a result of the fact that no recourse could be had against the parties that ultimately received the relevant funds (ECLI:NL:HR:2014:2628). The Supreme Court ruled that in such a situation, i.e. where it is established that the defendant was acting in the performance of his role as a company director, the defendant's conduct should always be tested against the abovementioned higher standard: for the director to be held personally liable, serious culpability is required. It should be noted that in this specific case, the Supreme Court based its conclusion that the director was personally liable on a hypothetical presumption – required by a Dutch procedural rule – that he had acted seriously culpable. Whether the director's conduct was in fact seriously culpable will be decided by the Court of Appeal, to which the case has been referred by the Supreme Court.
The second case decided by the Supreme Court, also on 5 September, involved a pledge created by a company's director for the benefit of the company's financier (ECLI:NL:HR:2014:2627). The central complaint was that this pledge – which was intended to, among other things, secure the repayment of a loan – was of a lower ranking than that agreed. In these circumstances too, the Supreme Court refused to lower the threshold for directors' personal liability. On the one hand, the decision shows how strongly the court adheres to the high threshold for such liability, but on the other hand, it does raise the question of where exactly the border lies.
Lessons to be learned?
From these decisions it can be concluded that the Supreme Court continues to adhere to the high threshold for liability, also in cases where it appears evident that creditors have been disadvantaged by the conduct of the director in question.
In this sense, the intermediation case is the more clear-cut of the two. The director sued had acted in contravention of specific payment instructions and was aware of the background (the insolvency risks). In the absence of either of these two elements, the claim would probably have been rejected.
The pledge case is different because while, admittedly, a lower-ranking pledge than that agreed was created, unlike in the intermediation case it could not be concluded here that it was foreseeable, at the time the obligation to create the pledge arose, that the repayment obligation would not be met. The Supreme Court went on to reject the personal liability claim on the grounds that the mere fact that a lower-ranking pledge had been granted did not mean that damage had been incurred.
So, good news for directors: the Supreme Court is sticking to the high threshold for holding them personally liable. This means that enterprising directors who perform their duties in good faith and in the company's interest will continue to enjoy the protection they deserve.
Of course – and with good reason – certain limits apply. If it is objectively foreseeable that a director's conduct will damage creditors, he should not count on protection, especially if that conduct was not in the company's interest. In addition, if a director's activities mean that he is subject to a special duty of care – such as in the areas of legal practice, medical practice and brokerage – the higher standard for personal liability may not help him. The more foreseeable the damage and/or the more concrete the duty of care, the more likely it is that the director will be held personally liable. Moreover, the higher liability threshold does not apply to conduct other than in the capacity of director. Where exactly the boundaries lie will have to be determined in case law.