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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?

The directors of a company which fails to meet its payment obligations must declare the company bankrupt at the clerk’s office of the competent district court within a month. If the directors fail to do so, they may be sued for negligent or fraudulent bankruptcy, both of which constitute criminal offences under Articles 573 to 578 of the Commercial Code.

Directors may be held personally liable for the company's bankruptcy and consequently its debts if the conditions set out in Article 495 of the code are met. In particular, the directors may be declared personally liable if they:

  • pursued their own interests when acting on behalf of the company;
  • disposed of the company's assets as if they were their own; or
  • improperly pursued, for their own benefit, an operating deficit when it was clear that this would lead to a deferment of payments.

Moreover, the court may order the directors to bear all or some of the company's debts if their gross negligence contributed to the company’s insolvency (Article 495-1 of the Commercial Code).

If a shareholder actively interferes in the management of the company, a court may find that it was a de facto director of the company. In this case, the rules on directors will also apply to the relevant shareholder(s), who will face the same potential liability as the actual directors. In particular, shareholders acting as de facto directors may be declared personally liable if they:

  • pursued their own interests when acting on behalf of the company;
  • disposed of the company's assets as if they were their own; or
  • improperly pursued, for their own benefit, an operating deficit when it was clear that this would lead to a deferment of payments.

Moreover, the court may order a shareholder(s) who acted as a de facto director to bear all or some of the company's debts, if their gross negligence contributed to the insolvency (Article 495-1 of the Commercial Code) and if the insolvency is considered fraudulent (Articles 573 to 578).

Defences

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

In order to avoid liability, directors must be able to demonstrate that they always acted in the company’s best interest and did not commit any wrongful acts, dispose of the company's assets as their own or pursue, for their own benefit or the benefit of related parties, a loss-making activity. They must also be able to show that they properly prepared and maintained the company's books and accounts and, in general, observed their statutory obligations (including the duty to file for bankruptcy within one month of when the company ceased to meet its payment obligations) and duties as directors.

The liability of a parent company is generally limited to its initial contribution to its subsidiary, provided that said subsidiary is a limited liability commercial company. However, it should be able to show that it did not interfere with the company's business and never participated in its management in lieu of the duly appointed directors.

Due diligence

What due diligence should be conducted to limit liability?

In order to mitigate liability, directors must always be careful to act in the company's best interest, which means they must place the company's interest before their own when taking decisions. All managerial decisions must be to the company's benefit. Further, in defining corporate strategy, a director must act as a reasonably prudent person and should be careful:

  • to manage the company's business in good faith and with due care, in a competent, diligent, prudent and active manner, in the company's interest;
  • to respect the duties imposed by law and by the company's articles of association; and
  • to do nothing which falls outside the company's corporate purpose.

Directors must also refrain from comingling their assets with those of the company. Directors which fail to meet the company’s payment obligations must, within one month, declare the company bankrupt at the clerk’s office of the competent district court. Although there is no shift of fiduciary duties in the vicinity of bankruptcy under Luxembourg law, this is the only way for the directors to avoid being sued for negligent or fraudulent bankruptcy.

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