Directors’ Liability in the Pays Bas

Important sources for liability of directors of a legal entity such as a B.V. (limited), are civil and corporate law. According to Dutch corporate law, directors are liable towards the legal entity in case of improper performance of their duties. A high liability threshold is applicable: a director is solely liable in case the director may be attributed serious blame in relation to the improper performance.

This “internal liability” of the director towards the legal entity should be distinguished from the external liability of the director towards third parties. In principle, it is the legal entity that shall be liable towards third parties in case of underperformance by the legal entity. However, based on tort law the director can be held personally liable under certain circumstances. Again, the director is only liable in case the director may be attributed serious blame.

In case of bankruptcy of a corporation, each director can be personally liable for debts that cannot be paid with the remaining assets of the corporation subject to the following conditions being met (I) improper performance by the board of their duties and (II) it is likely that such improper performance is a material cause of the bankruptcy. In case the board did not fulfil the obligations to maintain a proper administration and to publish the annual accounts in time, this always qualifies as improper performance by the director and on the basis of law it is assumed that this improper performance is a material cause for the bankruptcy which may be rebutted by the director.

In case the director has an employment agreement, such director may also be held liable based on employment law but only in case of wilful conduct by the director or if the director has been deliberately reckless.

Under tax law, directors can become liable for fulfilling certain tax-obligations of the corporation in case the corporation is not able to pay such taxes and it is plausible that such is the consequence of improper performance by the directors of their duties. Directors can also be held personally liable in case the Tax Authorities have not been notified in time that the corporation is not able to fulfil its tax obligations.

Under administrative legislation such as competition law, financial law and environmental laws, administrative sanctions may also be imposed on directors by the competent authorities in special circumstances, such as when a director qualifies as a “de facto manager” in relation to the violation of the administrative legislation. Accordingly, a director may be fined for antitrust violations for an amount up to EUR 900.000,-.     

Under Dutch law two forms of directors’ liability are distinguished: internal and external liability.

Internal liability pertains to cases in which there is an ‘improper performance of duties’ (onbehoorlijke taakvervulling) by the director towards the legal entity such as the B.V (limited) and the director can be attributed a ‘serious blame’ (ernstig verwijt). The legal entity can then hold the director liable for the damages suffered as a result of this improper performance. If the board of a corporation has multiple directors, then all directors can be held jointly liable by the company for mismanagement (collective liability).

External liability against third parties may arise when the corporation acts negligently/unlawful towards such third parties. Examples of unlawful corporate acts for which a director can be held liable are entering into obligations of which the director knows or may know that the legal entity will not be able to fulfill them, acting contrary to the articles of association, failure to ensure that proper accounting is kept and failure to prepare and publish the annual accounts of the company.

In case of bankruptcy, a (board of) director(s) can also be held liable for ‘improper performance of duties’ by the administrator of the bankruptcy, if it is plausible that the improper performance of duties has been an important cause of the bankruptcy. Furthermore, and as explained before, a director can be held liable by the tax and regulatory authorities under special circumstances.

Based on the Dutch Criminal Code both natural persons who gave factual leadership to the prohibited action and legal entities can be held accountable for committed crimes.

The primary precondition for criminal liability of a director is proof that the legal entity committed the crime. If that’s not the case, the director cannot be held criminally accountable for the crime of which he is suspected in his capacity of director.

If the criminal liability of the company is established, the next step will be to determine whether the director is criminally liable as well. A high position within the company is necessary in that respect, which a director in general always has. Furthermore, the director must have known about the forbidden behaviour, or at least must have accepted the significant chance of committing a crime by acting the way the company did. Besides this for criminal liability of the director the director must have had the power to do something about it but neglected to do so. So, being a director in itself is not sufficient for criminal liability.

In principle, a company could commit every crime stated in de Dutch Criminal Code, but the main sources of such criminal liability would be cases like fraud, embezzlement, harming creditors knowing bankruptcy is imminent, money laundering and other cases of corporate and economical crime (these examples are not exhaustive). The penalties prescribed for the crime could vary from imprisonment for several years to a criminal fine rising up to high amounts (for example: EUR 90,000 for money laundering). Besides that, a judge can decide to ban a director from practicing in his profession for a certain amount of time. The duration of this period depends on the kind of penalty the director got. In case of a fine for example, the duration can be set for a period of two to five years. Another drastic consequence of committing a criminal offence as a director, is that the company may be (temporarily) shut down by the court.

The Public Prosecution Department of the Netherlands is the authority that may initiate criminal proceedings against directors. A party concerned in regard to a criminal offense, may file a complaint with the competent Dutch Court of appeal in case a criminal offense will not be prosecuted by the Public Prosecution Department of the Netherlands. The Court of appeal is authorized to decide on such request and to order that prosecution of the criminal offense should take place.

The statutes of limitations for a claim in civil cases is 5 years, as from the day the injured party (i.e. the legal entity, third party or administrator of the bankruptcy) has become aware of both the damage and the person liable for it. A claim by the administrator of the bankruptcy can only be instituted on the grounds of improper performance of duties in the period of three years prior to bankruptcy.

In case of criminal offenses committed by the company, the director can in some cases be held criminally liable and sentenced to a fine or imprisonment. There are several criminal offences a director of a company can commit, for example fraud, embezzlement, harming creditors knowing bankruptcy is imminent (these examples are not exhaustive). The statute of limitations in case of fraud and harming creditors knowing bankruptcy is imminent is twelve years, The statute of limitations in case of embezzlement is six years.

In case the director has not filed the annual accounts on time, this is considered an economic offence. The statute of limitations in this case is three years.

Although liability of the legal entity is the starting point, and the bar is set high when it comes to the liability of directors, it is wise to sign up for a Directors & Officers Insurance (D&O). Normally, the company is the policyholder and the director is qualified as the insured.

The claims that are to be covered by the D&O could be civil claims, but also claims regarding criminal or administrative liabilities or legal procedures for example. Defence expenses could be part of those claims as well.

Claims/liabilities can also be excluded from the D&O which is subject to the terms of the insurance policy. Common exclusions are claims from the company itself against the director, liabilities created by acting intentionally by the director, criminal and administrative penalties and the withholding of relevant information at the start of the insurance.

Most D&O’s have duration of one year and have a ‘claims-made’ character. This means that claims that arose before the start of the year, or arise just after it, are not covered by the D&O.

Appointed and registered (statutory) directors are considered legal directors and are subject to the legal regime in force for directors. This is also the case if the director in fact is not involved in the management and does not perform any tasks or actions. The appointment and registration as director in itself therefore means the director can be subjected to liability as a director.

Under Dutch law, the court may reduce the amount of the liability of an individual director if this appears to him to be excessive, taking into account the time during which that director was in office as such in the period in which the improper performance of duties took place.

Non-executive directors that are not appointed and registered (statutory) directors and are not involved in the determination of the policy of the company will not easily be legally qualified as a director.

However, persons not formally appointed and registered (statutory) as director but acting as executive directors involved in the determination or co-determination of the policy of the company are legally equated with a director, as if they are director.

The collective responsibility and joint and several liability also apply to supervisory directors of legal entities. The standard is slightly different; a supervisory director has a different task than a director. The task of the supervisory board is to supervise the general course of affairs and the policy of the management board and to advise the management board. In performing his duties, a supervisory director also focuses on the interests of the company and its affiliated enterprise.

The supervisory directors are collectively responsible and jointly and severally liable for seriously culpable improper supervision. In the event of (collective) improper supervision, an individual supervisory director can exculpate himself by stating and, if necessary, proving that the improper performance of duties by the supervisory board is not his fault – i.e. that he cannot be (seriously) blamed – and that he has not been negligent in taking measures to avert the consequences of the improper performance of his duties.

Under Dutch law it is possible for a legal entity to act as director of another legal entity. If the direct director is a legal entity the Dutch Civil Code provides that the joint and several liability rests on everyone who is a director of that legal entity at the time the liability of the legal entity arises. The provision therefore 'breaks' through a legal person (director) each time, until a natural person is encountered as director. The Dutch Civil Code aims to prevent natural persons from escaping director's liability through the intermediary of a legal person.

The natural person behind the legal person director can avoid liability under the Dutch Civil Code by demonstrating that he cannot personally be blamed for the conduct on which the liability of the legal person director is based.