Directors’ and officers’ liability after bankruptcy

In the event of the bankruptcy of a company, organization or institution, a bankruptcy trustee will investigate possible directors’ and officers’ liability after bankruptcy. If the regularity audit shows that (one or more) directors are guilty of fraudulent acts, misconduct or mismanagement, a bankruptcy trustee can hold the board (privately) liable for the debts of the bankrupt company. In this case, the bankruptcy was likely caused by mismanagement.

Directors’ and officers’ liability: the consequences

Mismanagement includes; entering into obligations of which the director knew or should have known that the company would not be able to fulfill them, keeping incomplete records and/or failing to file the annual report and accounts on time. In these cases, the bankruptcy trustee, backed by the law, can argue that manifest mismanagement is a major contributor to the bankruptcy. In this situation, each director has the opportunity to demonstrate that the mismanagement is not due to his or her actions. In addition, a director can defend himself under certain circumstances by showing that he has taken measures to prevent the consequences of mismanagement. Directors’ and officers’ liability does not occur in the event of bankruptcy alone. A director can also be held liable in the event of failure to meet the requirement to keep records and/or failure to meet the publication requirement.

Joint and several liability in the event of bankruptcy

In the event of mismanagement by directors of a company, organization, foundation or association, as a result of which a legal entity has suffered damage, collectivity of the board is deemed to exist. Collectivity in fact means joint and several liability of the board in bankruptcy, which means that every director is liable for the negative balance. In the event of directors’ and officers’ liability after bankruptcy, the private assets of partners or directors can be drawn on to remedy this negative balance. This liability can continue to have effect if a director dies. In that case, a claim for directors’ and officers’ liability may be brought against an estate.

Fraudulent acts in bankruptcy

As soon as a debtor knows that the bankruptcy of a company or organization is inevitable, the debtor has an obligation to treat each creditor equally. If a debtor appears to have ‘favoured’ a creditor before the bankruptcy, for example, in the form of making a payment, transfer of ownership or entering into an agreement, this may be tantamount to a fraudulent act. A fraudulent act, i.e. disadvantaging creditors one year prior to the bankruptcy, can be set aside by a bankruptcy trustee and lead to directors’ and officers’ liability in the event of bankruptcy.

Shareholders’ liability in the event of bankruptcy

Under very exceptional cases, shareholders can be sued by a bankruptcy trustee in the event of bankruptcy. In general, shareholders cannot be held liable for the debts of the company. The rules of directors’ and officers’ liability in the event of bankruptcy, both under and outside of the bankruptcy, do not apply to the liability of a shareholder in bankruptcy. Within a group, a parent company may be liable for the debts of a subsidiary under special circumstances. In principle, a shareholder can also be ordered to repay dividends to the estate received one year prior to the bankruptcy.

Directors’ and officers’ liability bankruptcy

The lawyers at Fruytier Lawyers in Business have a lot of experience in conducting legal proceedings surrounding directors’ and officers’ liability after bankruptcy. Our specialists in bankruptcy law and insolvency law regularly act as bankruptcy trustees and are therefore able to provide you with professional and thorough assistance during a possible legal dispute. Through personal advice and committed guidance, we offer support in filing a complete bankruptcy petition and providing exculpation. Have a business conflict and want to know what risks you run as a director? Feel free to contact us for more information about procedures. You are not committed to anything.