Internal directors' liability
Written by:
Hein Kernkamp
What is internal directors' liability?
The internal liability of the director is the liability of the director towards the company. So it is a liability vis-à-vis the company for a culpable mistake made by the director.
In other articles at our website you can read about directors' liability in general, external directors' liability towards individual creditors and directors' liability in case of bankruptcy, based on anti-abuse regulations.
But let's get back to the internal directors' liability, which is codified. Article 2:9 of the Dutch Civil Code stipulates that every director is obliged vis-à-vis the legal person to perform his duties properly.
In the 1997 Staleman / Van de Ven judgment, the Netherlands Supreme Court ruled that a director may be expected to be well-suited to his duties and to perform them meticulously. So anyone who is appointed as a director and has accepted his appointment cannot later try to escape liability by claiming that he simply lacked the capabilities.
When is a director liable towards the company?
In the 1997 Staleman / Van de Ven judgment, the Supreme Court ruled that internal liability can only be assured if there is a clear and obvious shortcoming. In other words, there must be a serious blame on the director concerned.
What circumstances play a role when holding a Netherlands company director liable?
Whether there is a serious blame must be assessed in the light of all the circumstances of the case. This could include:
- the nature of the business activities and the associated risks in general
- the division of tasks within the board
- any internal guidelines and regulations
- the information and data that a director had or should have had at the time of dealing
What are examples of liability of a Netherlands company director?
The company has the burden of proof of the existence of the serious blame, so the bar is high. Case law shows that the directors' internal liability may amongst others arise in the following cases:
- withdrawing funds from the legal person
- mixing private matters with matters of the legal person
- competing with the company and, in particular, subordinating the company's interest to private interests or the interests of others
- unauthorized contracting
- taking unnecessarily large financial risks
- making decisions with far-reaching financial consequences without proper preparation
- entering into transactions that significantly exceed the financial strength of the legal person
- the non-prevention of undercapitalization
- neglecting credit monitoring
- not taking out the usual insurance policies
If it is established that an incorrect task has been performed by a director, in principle all directors are jointly and severally liable. However, an individual director may still be able to disculpate himself.
How can the director of a Netherlands company disculpate himself?
The director can disculpate himself by showing that, also in view of the duties assigned to others, he himself cannot be seriously blamed, while he also has not been negligent in taking measures to avert the consequences of the shortcoming. If a director observes that a co-director is not properly performing his duties and a case of improper management may be at hand, that director will have to intervene in order to be able to continue to rely on the disculpation ground, even if the task in question has only been assigned to the co-director.
Discharge
Discharge is granted by the General Meeting of Shareholders. This is never a full discharge for whatever happened before the date of discharge. One can only grant discharge for what is known. A discharge is therefore not a guarantee for the director that he will not be blamed for unknown shortcomings later.
Consult a Netherlands lawyer
Our lawyers regularly advise and litigate on directors' and officers' liability. Together with you we can see whether or not the facts justify making a claim. Call us to make an appointment for a non-binding informative meeting, in which we can indicate what we can do for you. It is not without reason that our motto is: "Your problem, our concern."
More information?
Hein Kernkamp will gladly help you further.
