The bar for director liability is high, but in practice that does not prevent parties from holding directors personally liable. Creditors, trustees, and other third parties regularly attempt to hold the director liable as well. When does such a claim have a good chance of success in court, and when does it not?
Under Article 2:9 of the Dutch Civil Code, a director must perform his or her duties with due care. Liability arises only in the event of serious negligence. The bar is therefore deliberately set high: the law must allow room for entrepreneurship and risk-taking, without directors being held personally liable for every setback. Whether there is a serious breach depends on all the circumstances.
In practice, this is particularly relevant in the following situations:
In principle, directors are collectively liable in such cases. Only those who can demonstrate that they are not seriously at fault and that they attempted to prevent the damage may be exempt from liability.
A director may also be personally liable to third parties (such as creditors). Here, too, the threshold is high: there must be a sufficiently serious personal fault.
In practice, this mainly involves two situations:
A director is liable if he enters into obligations while knowing or having reason to know that the company cannot fulfill them and offers no recourse.
Liability may also arise if a director ensures (or allows) that creditors remain unpaid, for example by diverting assets or making selective payments without justification.
In both situations, director liability is not a disguised guarantee for the company’s debts: a director is liable only for damages resulting from his or her personally culpable conduct.
In addition to these general standards, more specific rules apply in certain situations. For example, failure to maintain proper, up-to-date records and/or failure to file the annual financial statements in a timely manner in the event of bankruptcy will lead to a presumption of improper management. Furthermore, this improper management is generally regarded as a major cause of the bankruptcy. In such cases, the trustee may hold the director liable for the shortfall in the bankruptcy estate.
In addition, a separate regime applies to taxes such as VAT and payroll taxes, under which failure to report an inability to pay in a timely manner may result in personal liability.
In addition, a director may also be personally liable under a contract, for example, based on a guarantee or joint and several liability. This is separate from director’s liability: in such cases, liability arises directly from the agreement entered into.
Director liability is an exception with a deliberately high threshold. It protects entrepreneurship, but it is not a free pass. At the same time, we see in practice that this threshold is not always kept clearly in mind and that liability is sometimes assumed too quickly if the outcome is unsatisfactory for a creditor. That is precisely why it is important to continue to closely monitor the legal framework.
