Starting a company of your own is an attractive activity for a lot of people and comes with several advantages. However, what (future) entrepreneurs seem to underestimate, is the fact that founding a company also comes with disadvantages and risks. When a company is founded in the form of a legal entity, the risk of liability of directors is present.
A legal entity is a separate legal body with a legal personality. Therefore, a legal entity is able to perform legal actions. In order to achieve this, the legal entity needs help. Since the legal entity only exists on paper, it cannot operate on itself. The legal entity has to be represented by a natural person. In principle, the legal entity is represented by the directors’ board. Directors can perform legal actions on behalf of the legal entity. The director only binds the legal entity with these actions. In principle, a director is not liable for the debts of the legal entity with his personal assets. However, in some cases liability of directors can occur, in which case the director will be personally liable. There are two types of directors’ liability: internal and external liability. This article discusses the different grounds for liability of directors.
Internal liability of directors
Internal liability means that a director will be held liable by the legal entity itself. Internal liability derives from article 2:9 Dutch Civil Code. A director can be held internally liable when he fulfilled his tasks in an improper way. Improper fulfilment of tasks is assumed when a severe accusation can be made against the director. This is based on article 2:9 Dutch Civil Code. Furthermore, the director may not have been negligent in taking measures in order to prevent the occurrence of improper management. When do we speak of a severe accusation? According to case law this needs to be assessed by taking all circumstances of the case into account.
Acting contrary to the articles of incorporation of the legal entity is classified as a hefty circumstance. If this is the case, directors’ liability will in principle be assumed. However, a director can bring forward facts and circumstances indicating that acting contrary to the articles of incorporation does not cause a severe accusation. If this is the case, the judge should explicitly include this in his judgement.
Several internal liability and exculpation
Liability based on article 2:9 Dutch Civil Code entails that in principle all directors are severally liable. Severe accusations will therefore be made towards the entire directors’ board. However, there is an exception to this rule. A director can exculpate (‘excuse’) himself from directors’ liability. In order to do so, the director must demonstrate that the accusation cannot be held against him and that he has not been negligent in taking measures in order to prevent improper management. This derives from article 2:9 Dutch Civil Code. An appeal on exculpation will not be easily accepted. The director must demonstrate that he took all measures in his power in order to prevent improper management. The burden of proof lies with the director.
A division of tasks within the directors’ board can be of importance to determine whether or not a director is liable. However, some tasks are considered tasks that matter to the entire directors’ board. Directors should be aware of certain facts and circumstances. A division of tasks does not change this. In principle, incompetence is not a ground for exculpation. Directors can be expected to be properly informed and to ask questions. However, situations may occur in which this cannot be expected of a director. Therefore, whether or not a director can successfully exculpate himself, greatly depends on the facts and circumstances of the case.
External liability of directors
External liability entails that a director is liable towards third parties. External liability pierces the corporate veil. The legal entity no longer shields the natural persons who are the directors. The legal grounds for external directors’ liability are improper management, based on article 2:138 Dutch Civil Code and article 2:248 Dutch Civil Code (within bankruptcy) and an act of tort based on article 6:162 Dutch Civil Code (outside bankruptcy).
External liability of directors within bankruptcy
External directors’ liability within bankruptcy applies to private limited liability companies (the Dutch B.V. and N.V.). This derives from article 2:138 Dutch Civil Code and article 2:248 Dutch Civil Code. Directors can be held liable when the bankruptcy was caused by mismanagement or mistakes of the directors’ board. The curator, who represents all creditors, has to investigate whether or not directors’ liability can apply.
External liability within bankruptcy can get accepted when the directors’ board has improperly fulfilled its tasks and this improper fulfilment is apparently an important cause of the bankruptcy. The burden of proof with regard to this improper fulfilment of tasks lies with the curator; he has to make plausible that a reasonably thinking director, under the same circumstances, would not have acted in this way. Actions that impair creditors in principle generate improper management. Abuse by directors must be prevented.
The legislator has included certain assumptions of proof in article 2:138 sub 2 Dutch Civil Code and article 2:248 sub 2 Dutch Civil Code. When the directors’ board does not comply with article 2:10 Dutch Civil Code or article 2:394 Dutch Civil Code, an assumption of proof arises. In this case, it is assumed that improper management has been an important cause of the bankruptcy. This transfers the burden of proof to the director. However, directors can disprove the assumptions of proof. In order to do so, the director must make plausible that the bankruptcy was not caused by improper management, but by other facts and circumstances. The director must also show that he has not been negligent in taking measures in order to prevent the improper management. Moreover, the curator can only file a claim for the period of three years prior to the bankruptcy. This derives from article 2:138 sub 6 Dutch Civil Code and article 2:248 sub 6 Dutch Civil Code.
Several external liability and exculpation
Every director is severally liable for apparent improper management within bankruptcy. However, directors can escape this several liability by exculpating themselves. This derives from article 2:138 sub 3 Dutch Civil Code and article 2:248 sub 3 Dutch Civil Code. The director must prove that the improper fulfilment of tasks cannot be held against him. He may also not have been negligent in taking measures in order to avert the consequences of the improper fulfilment of tasks. The burden of proof in exculpation lies with the director. This derives from the articles mentioned above and is established in recent case law of the Dutch Supreme Court.
External liability based on an act of tort
Directors can also be held liable based on an act of tort, which derives from article 6:162 Dutch Civil Code. This article provides a general basis for liability. Liability of directors based on an act of tort can also be invoked by an individual creditor.
The Dutch Supreme Court distinguishes two types of directors’ liability based on an act of tort. Firstly, liability can be accepted on the basis of the Beklamel standard. In this case, a director has entered into an agreement with a third party on behalf of the company, while he knew or reasonably should have understood that the company could not comply with the obligations deriving from this agreement. The second type of liability is frustration of resources. In this case, a director caused the fact that the company is not paying its creditors and is unable to fulfil her payment obligations. The actions of the director are so careless, that a severe accusation can be made against him. The burden of proof in this lies with the creditor.
Liability of the legal entity director
In the Netherlands, a natural person as well as a legal entity can be a director of a legal entity. To make things easier, the natural person who is a director will be called the natural director and the legal entity who is a director will be called the entity director in this paragraph. The fact that a legal entity can be a director, does not mean that directors’ liability can simply be avoided by appointing a legal entity as director. This derives from article 2:11 Dutch Civil Code. When an entity director is held liable, this liability also lies with the natural directors of this entity director.
Article 2:11 Dutch Civil Code applies to situations in which directors’ liability is assumed based on article 2:9 Dutch Civil Code, article 2:138 Dutch Civil Code and article 2:248 Dutch Civil Code. However, questions arose whether or not article 2:11 Dutch Civil Code also applies to directors’ liability based on an act of tort. The Dutch Supreme Court has decided that this is indeed the case. In this judgement, the Dutch Supreme Court points to the legal history. Article 2:11 Dutch Civil Code aims to prevent natural persons from hiding behind entity directors in order to avoid liability. This entails that article 2:11 Dutch Civil Code applies to all cases in which an entity director can be held liable based on the law.
Discharge of the directors’ board
Directors’ liability can be averted by granting discharge to the directors’ board. Discharge means that the policy of the directors’ board, as conducted until the moment of discharge, is approved by the legal entity. Discharge is therefore a waiver of liability for directors. Discharge is not a term that can be found in the law, but it is often included in the articles of incorporation of a legal entity. Discharge is an internal waiver of liability. Therefore, discharge only applies to internal liability. Third parties are still able to invoke liability of directors.
Discharge only applies to facts and circumstances that were known to the shareholders at the time the discharge was granted. Liability for unknown facts will still be present. Therefore, discharge is not a hundred percent safe and does not offer guarantees for directors.
Entrepreneurship can be a challenging and fun activity, but unfortunately it does come with risks. A lot of entrepreneurs believe that they can exclude liability by founding a legal entity. These entrepreneurs will be in for a disappointment; under certain circumstances, liability of directors can apply. This can have extensive consequences; a director will be liable for the debts of the company with his private assets. Therefore, the risks deriving from directors’ liability should not be underestimated. It would be wise for directors of legal entities to comply with all legal stipulations and to manage the legal entity in an open and deliberate manner.
If you have questions or comments after reading this article, please feel free to contact Maxim Hodak, lawyer at Law & More e ala i [imeli puipuia], or Tom Meevis, lawyer at Law & More e ala i [imeli puipuia], pe valaʻau le +31 (0) 40-3690680.
 ECLI:NL:HR:1997:ZC2243 (Staleman/Van de Ven).
 ECLI:NL:HR:2002:AE7011 (Berghuizer Papierfabriek).
 ECLI:NL:HR:2001:AB2053 (Panmo).
 ECLI:NL:HR:2007:BA6773 (Blue Tomato).
 ECLI:NL:HR:2015:522 (Glascentrale Beheer B.V.).
 ECLI:NL:HR:1989:AB9521 (Beklamel).
 ECLI:NL:HR:2006:AZ0758 (Ontvanger/Roelofsen).
 ECLI:NL:HR:1997:ZC2243 (Staleman/Van de Ven); ECLI:NL:HR:2010:BM2332.