In business you may take risks but in this time of the economic downturn it is even more important to know your potential risks and liability.
The Dutch Civil Code (“DCC”) contains several provisions where a managing director can be held personally liable. Each managing director is obliged to properly fulfil his task, and failure to do so will make him liable towards the company. For the management board and the company it is important to know the risks and how to limit your liability. Some points for attention are set out below.
- Filing annual accounts. Dutch companies are obliged to report annually on their activities and transactions in accordance with specific rules of Dutch law. These rules set out the rules and regulations for companies in connection with the preparation, presentation and publication of their annual accounts, the management report and the supplementary information. Dutch law attaches special importance to the duty to publish annual accounts (and the duty of bookkeeping) in case of bankruptcy: in the event of bankruptcy, the management of the relevant bankrupt company will be personally liable for the deficit unless they can prove that the bankruptcy was not caused by their mismanagement.
- De facto management board directors. It should be noted that all persons, who, without being members of the management board of a company, perform acts of management for a specific period of time or under certain circumstances (by virtue of a provision of the articles of association or a resolution of the general meeting of shareholders), are deemed to be de facto managing directors as far as their rights and obligations with regard to the company and third parties are concerned. These persons can subsequently also be held liable towards the company and third parties.
- Check of securities. An example of a security is the so-called “403 declaration” (section 2:403 of DCC) which can be described as the obligation of a parent company (i.e. the company in whose annual accounts the financial information is consolidated in respect of its subsidiaries) to declare in writing that it assumes joint and several liability for any obligations arising from legal acts of its subsidiaries. The 403 declaration can be withdrawn; however, this does not take away the liability for debts prior to the revocation of the 403 declaration.
- Transgression of the object. Furthermore, it is noted that the management board must act within the objects of the company. If the company performs a transaction outside the scope of the objects, the transaction may be ultra vires and the company can request annulment if the other party knew or, without having made any investigation, should have known that it was ultra vires. Even when a transaction falls within the objects, it may be ultra vires and subject to annulment if it cannot be in the interests of the company, and the other party knew or should have known this.
It is advisable to limit personal liability by taking out a directors’ and officers’ liability insurance and/ or to obtain an indemnification by the company or its (ultimate) parent company.
In recent years receivers in bankruptcy are meticulously exploring the possibility of successfully charging (former) directors of bankrupt companies to realise an optimal settlement of creditors’ claims. They are more and more successful, so it would really pay to keep a keen eye on the above!