Liability of directors and supervisory officers

Entrepreneurship involves taking risks but as a director, you may never go so far as to manage the company improperly and thereby cause damage to the company (internal directors’ and officers’ liability) or to third parties (external directors’ and officers’ liability). Directors can be held privately liable for bad management and (apparent) mismanagement.

Directors’ liability: not limited to a listed company, but a real risk for all entrepreneurs, regardless of size

Mismanagement may occur in the following cases, among others:

• Deliberately neglecting your obligations, for example, by not paying bills;
• When you bind the company to third parties without authorization;
• Entering into transactions that significantly exceed the financial strength of your company, for example, irresponsible joint and several liability claims;
• When the usual insurance policies are not taken out;
• Taking unnecessary large financial risks;
• When you mix private affairs with those of the company;
• Failure to meet legal requirements, for example, not registering the company in the Commercial Register of the Chamber of Commerce or not having the association’s articles of association recorded in a notarial deed;
• When you put your own interests before those of the company;
• When you improperly prepare big decisions that carry major financial risks.

If you – or one of your fellow directors – can be blamed for the foregoing, under Article 2:9 of the Dutch Civil Code, there may be a case of directors’ and officers’ liability on account of improper performance of duties. Only the person to whom serious blame can be attributed is liable. Whether mismanagement exists is determined based on reasonableness and fairness, according to the standards of propriety that are currently specified by the courts. Directors’ and officers’ liability is therefore not a static concept. It is not just the directors of large listed companies who are held to account. Within SMEs and non-profit organizations, associations and foundations too, claims are occurring more often and more readily. And did you know that as a director or supervisory officer of an association or foundation, you can also be held personally liable? As a director, you are individually responsible for your share in the management and therefore in the policy of the company. If a liability claim based on improper performance of duties under Article 2:9 of the Dutch Civil Code is not successful in court, your creditors can still hold you liable through an action arising from a wrongful act (Article 6:162 of the Dutch Civil Code). It has been established in Article 6:162 of the Dutch Civil Code that he who commits an unlawful act against another, which can be attributed to him, is obliged to compensate the damage the other suffers as a result.  Both large and small businesses can be held to account via these two avenues, and the possibility of holding directors liable in a private capacity should in no way be underestimated. Want to know more and limit the risks? Please contact us!  You can also reach us via the general telephone number of our firm +31 (0)20 521 01 30.