Directors and officers

Directors’ liability – failure to commence proceedings and trading while insolvent

If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

If proceedings are not commenced within such time limit, the debtor may be subject to both criminal and civil liabilities. In practice, criminal sanctions will not be ordered for the sole fact of not having filed for bankruptcy in due time. Civil sanctions are, however, significant, as directors may be held personally liable for the increase of the liabilities resulting from the delay in filing for bankruptcy.

Liability claims for wilful misconduct are made by the bankruptcy trustee or by the creditor if the bankruptcy trustee does not make a claim within one month of a creditor so requesting.

Directors’ liability – other sources of liability

Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganisation actions? Can they be subject to sanctions for other reasons?

In general, directors and officers are not liable for the company’s debts. There are, however, in addition to the corporate rules on directors’ liability (in particular for breaches of the company’s articles of association or Belgian company law), certain specific provisions applicable in relation to bankruptcy. Accordingly, directors or former directors of a bankrupt company may be held liable at the request of the bankruptcy trustee or the creditors if, owing to their obvious and serious mismanagement, the company is unable to pay its debts in full. In such case, the directors will be liable to the extent that the creditors are not fully satisfied with the proceeds of the bankrupt estate. Also, specific legislation allows the tax and social security administration, as well as the bankruptcy trustee, to hold directors liable for certain amounts due in respect of compliance with tax and social security legislation.

Directors’ liability – defences

What defences are available to directors and officers in the context of an insolvency or reorganisation?

Defences for failure to commence proceedings and trading while insolvent

Liability exists as of the moment it has been determined that there was a failure to commence proceedings and that there was trading while insolvent. There is no requirement of causality between the late filing and the damages (ie, the increase of the liabilities resulting from the delay in filing for bankruptcy). As a result, the only defence is to demonstrate that the company was not yet insolvent.

 

Defences for other sources of liability for the debts of the company

First, directors and officers may refute their liability by proving that they did not commit a manifestly grave error. If the directors or officers prove that the error that they committed was not manifest or grave, they may avoid liability. Second, directors and officers may refute their liability by proving that their mismanagement did not contribute to the bankruptcy (ie, that there is no causality). However, the threshold for providing such proof is very high, as they will have to prove that, without their mismanagement, bankruptcy would have occurred in the same way.

Shift in directors’ duties

Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganisation proceeding is likely? When?

No, there is no shift of duties provided for by law.

Directors’ powers after proceedings commence

What powers can directors and officers exercise after liquidation or reorganisation proceedings are commenced by, or against, their corporation?

During reorganisation proceedings, the company remains in charge of all its assets and directors and officers will have to manage them to implement the amicable settlement or the reorganisation plan, or to complete the transfer of business.

During bankruptcy proceedings, the assets of the company are managed by the bankruptcy trustee.

During liquidation proceedings, directors and officers have no power, as the appointed liquidator will be in charge of the liquidation of the company. However, if no liquidator has been appointed, directors and officers are presumed liquidators.