Directors' liability

Under article 2:9 DCC a director is liable to the company for improper performance of duties. The threshold is a serious personal reproach (ernstig verwijt) in the sense of HR 10 January 1997 (Staleman/Van de Ven), assessed on all the circumstances of the case. Those circumstances include the nature of the company's activities, the risks attaching to them, the allocation of duties within the board, any applicable board rules, the information available to the director, and the care a reasonably competent director in the same position would have exercised.

Liability under article 2:9 DCC is collective as a rule, and individual exoneration remains possible. Because the assessment looks backwards at how a decision was taken, the board's own record is the primary defence: minutes that show what information was before the board, what alternatives were considered and why the decision was taken carry considerably more weight than an unrecorded process. The same record is what allows one director to establish that no serious personal reproach attaches to him or her where the board as a whole is criticised.

External liability is owed to third parties and generally arises in tort under article 6:162 DCC only where the director can personally be seriously reproached. It may arise, depending on the circumstances, where the director entered into an obligation knowing, or where the director should have understood, that the company could not meet it and would offer no recourse; frustrated a creditor's recovery; made misleading statements about the company's position; or made a selective payment that unduly prejudiced a creditor. The analysis in a given case turns on what the director knew, when, and whether the high threshold for personal liability is met.

Two extensions widen the exposure. For liability in bankruptcy, a person who has determined or co-determined the policy of the company as if he or she were a director is treated as a director. Article 2:11 DCC extends liability up the chain where a director is itself a legal entity: the directors of that entity are jointly and severally liable alongside it, and the rule applies through successive layers. Personal holding structures therefore do not insulate an individual from director liability.

A director can also become personally liable for certain taxes, social security contributions and pension contributions that the company fails to pay. The central question is then whether the company gave timely notice of its inability to pay.

A timely notification puts the director in a stronger position: the tax authority or the pension fund then has to prove manifestly improper management. Where the notification is late or defective, the director is in a much weaker position. That is why the notification belongs on the board's own agenda rather than with the payroll or accounts function alone.

Liability in bankruptcy under article 2:248 DCC for a BV and article 2:138 DCC for an NV is among the most serious exposures a Dutch director faces. Where the board has manifestly performed its duties improperly in the three years before bankruptcy, and that improper performance was an important cause of the bankruptcy, each director is jointly and severally liable to the estate for the deficit. The trustee brings the claim, and the deficit can far exceed anything a director could meet personally.

Two statutory presumptions make the claim considerably easier to bring than it first appears. If the company failed to keep proper books and records, or failed to publish its annual accounts on time, improper performance is established irrebuttably, unless the default is insignificant, and it is then presumed that this was an important cause of the bankruptcy. The director can rebut the causation presumption, but the burden has shifted. Late filing of annual accounts therefore belongs at board level rather than among administrative matters. The controls that reduce this exposure are straightforward ones: the annual accounts are filed on time every year without exception, the administration is kept in a state in which the company's rights and obligations can be ascertained at any time, the minutes record information, alternatives and reasoning rather than only outcomes, and a conflicts procedure is in place and observed. We advise boards to take advice at the point where distress becomes foreseeable rather than at the point where it becomes undeniable, and to record the basis on which the board decided to continue trading.

The architecture of the exposure is broadly comparable for supervisory directors and for non-executive directors in a one-tier board, although the content of their duties differs. The rules on internal liability and liability in bankruptcy apply correspondingly to supervisory directors; they apply directly to non-executive directors as members of the board. External liability in tort may also arise where its requirements are met. A supervisory director who follows the instructions of a nominating shareholder against the company's interest may incur liability if the applicable threshold is met.

The typical exposure for a supervisory or non-executive director is not a decision taken but a failure to act on information the board had, or a failure to insist on information the board should have obtained. Supervision that is passive when the company's position deteriorates is the pattern that recurs in the case law, and it is assessed on the same standard of a serious personal reproach. That makes the information protocol, the frequency and quality of reporting from the management board, and the record of what the supervisory board asked for and received a personal interest of every supervisory and non-executive director rather than an institutional formality. Where an individual member disagreed with the course taken, the minutes are the only place that position can later be established.