Directors' liability in The Netherlands
The Netherlands has strict rules regarding personal liability of directors of limited companies (B.V.) and public limited companies (N.V.), both before and after bankruptcy of a company.
Civil liability towards the company
If in the course of his duties, a director makes decisions that may later turn out to be detrimental to the company, this does not automatically lead to personal liability. Taking certain calculated risks is a normal part of running a business. Dutch corporate law therefore allows company directors a large amount of discretion in how they fulfil their responsibilities as a director.
However, article 2:9 of the Dutch Civil Code states that directors must fulfil their duties with due care and attention. Should they fail this duty of care, then the directors are personally liable for any damage caused to the company as a result. The Dutch Supreme Court has ruled that a director is personally liable if he is guilty of serious misconduct. The same Supreme Court ruling gives us a ruler to measure the conduct of the director by. If the actions of the board would not have been taken by any other reasonably acting and fully experienced director in their stead, then this action constitutes serious misconduct.
Examples of serious misconduct are:
- Fraudulent or illegal practices within the company;
- Taking unsustainable financial risks;
- Asset stripping;
- Diverting the company’s funds for personal use;
- Not properly insuring the company's tangible assets.
If a company has more than one director, then the whole of the board of directors is jointly and severally liable for all damages. Only if an individual director can prove that he had no knowledge of the misconduct or did all he reasonably could to prevent the actions that led to the damages, can they avoid liability. This may mean that a director that does not agree with the path chosen must step down to avoid liability.
Civil liability towards creditors
In certain circumstances individual creditors of the company can also hold directors separately liable for damage resulting form actions taken during their directorship. Examples of this are providing incorrect financial information or making undertakings on behalf of the company that they knew (or reasonably should have known) the company could not fulfil.
Liability after bankruptcy
If a company is declared bankrupt, then the Ditch Civil Code grants the trustee in bankruptcy the means to hold company directors personally liable for the total shortfall in funds resulting from the bankruptcy.
Article 2:248 of the Dutch Civil Code states that when company is declared bankrupt, each director shall be jointly and severally liable to the bankruptcy estate for the amount of the company’s debts that cannot be satisfied out of the liquidation of its assets, if the directors have manifestly performed their duties improperly and it may be assumed that these actions constituted an important cause of the bankruptcy.
The law automatically prescribes that the directors have performed their duties improperly in the following circumstances:
- The directors have not filed the company’s accounts with the Dutch chamber of commerce within the prescribed time after the end of the financial year;
- The accounts of the company have not been kept in accordance with good accounting practices and do not provide a true insight into the financial position of the company.
In such cases the burden of proof is shifted to the directors, who must then prove that their failure to file the company accounts or administrate the accounts properly did not constitute an important cause of bankruptcy. In such cases it can be extremely difficult for the directors to avoid liability.
The trustee can also hold the directors liable on the grounds of serious misconduct (as described under civil liability towards the company above), though it is then up to the trustee to prove that there has been serious misconduct leading to the company being declared bankrupt.
Should the trustee believe that persons who are not officially directors, but can be deemed to have directed the company, are largely responsible for misconduct or the non fulfilment of the duties of the company, article 2:248 of the Dutch Civil Code further provides that the trustee may hold these persons liable in the same manner as the actual company directors. If a director of a company is itself a legal entity, Dutch law provides that the corporate veil may be pierced until the natural persons behind the company or companies are reached. Liability comes to rest on these persons. Having a holding company or a foreign legal entity as director, does not therefore protect the persons behind the company.
Directors of a legal entity can also be held personally liable for unpaid tax debts of the company, if the directors have not reported the inability of the company to pay to the tax authorities within an allotted time after a tax debt has become due. This form of liability regards unpaid taxes such as wage withholding tax and VAT ("BTW"). Once the tax authorities have declared a director liable for overdue taxes imposed on company, it is up to the director to prove that the tax debt was left unpaid for reasons that were out of his sphere of control. Fiscal liability often occurs after bankruptcy, as the company is then no longer able to pay its own tax debts and the Dutch tax authorities then shift their focus onto the persons behind the company.
How can Bowmer & Nuiten help you?
Should you be confronted with claims by third parties, such as creditors or a trustee in bankruptcy relating to the directorship of a Dutch company, it is important to seek legal advice immediately. Veldhuijzen & Nuiten has years of experience in dealing with liability of company directors. Three of our lawyers are themselves experienced court appointed trustees in bankruptcy and can give you a clear insight into the possible actions of third parties and advise you on how to proceed.
Should you be considering liquidating a company in the Netherlands, it is also extremely important to identify any possible grounds for liability and to act accordingly before actual liquidation of the company. Bowmer & Nuiten can help you avoid the pitfalls that accompany liquidation.
Please feel free to contact Maria Bowmer with any questions or queries.