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A director is not easily held personally liable in the event of bankruptcy: this requires manifestly improper management that is a significant cause of the bankruptcy (Article 2:248 of the Dutch Civil Code). The test is whether a reasonably acting director would have acted in the same circumstances. A board that—forced by a dependent position—transferred activities free of charge therefore escaped liability.
In the event of bankruptcy, the trustee investigates whether directors' liability exists. In a recent case (ECLI:NL:RBROT:2021:9712), the trustee sought damages after directors had transferred important activities free of charge. This shows that you must also consider this risk in such agreements.
The trustee represents the creditors
A bankruptcy trustee winds up the bankruptcy in the interest of the creditors and recovers as much money as possible: collecting claims, selling assets to the highest bidder, and determining whether there is directors' liability — in which case he can hold the directors liable for a claim for damages.
The stepped test of Article 2:248 of the Dutch Civil Code
Directors' liability is not easily established . There must first be manifestly improper conduct : “manifestly” implies a clear and obvious impropriety. According to the Supreme Court, you compare this to how a reasonably thinking director would act under the same circumstances — not to a perfect director. Additionally, it must be plausible that this is a significant cause of the bankruptcy; in that case, the director is liable for the deficit (often covered by directors' liability insurance).
The bankruptcy trustee must prove this. The burden of proof: in the event of a breach of the accounting obligation and in the event of failure to file the annual accounts on time. In those cases, improper management is presumed to be a significant cause, unless the management proves otherwise.
The case: gratuitous transfer of activities
The bankrupt Farma had one major client (Benu), accounting for approximately 99% of its revenue, for whom it distributed incontinence products and medicines. When Benu partially withdrew that distribution business, Farma ran into trouble. In 2019, the remaining activities were transferred to Pharmaceutical without compensation, most of the staff transferred along with them, and the directors transferred their shares; bankruptcy followed in 2020. The bankruptcy trustee considered this to be evidently improper management (no compensation, not liquidated, claims not collected) and invoked the presumption of evidence, because the records had not been properly maintained since the end of 2018.
No directors' liability
The judge took into account that Farma had been suffering losses for a long time and was in a dependent position with hardly any room for negotiation — it is therefore not surprising that no compensation could be enforced. Perhaps not the optimal choice, but that is not necessary either: the question is whether a reasonably acting director would have acted in the same way, and that was the case here. Furthermore, the choice was not a major cause of the bankruptcy. Therefore, no directors' liability.
Frequently Asked Questions
When is a director liable in the event of bankruptcy?
In the case of manifestly improper management that is a major cause of the bankruptcy (Article 2:248 of the Dutch Civil Code). The criterion is whether a reasonably acting director would have acted in the same way under the same circumstances.
When does the burden of proof shift?
In the event of a breach of the accounting obligation or failure to file the annual accounts on time, improper management is presumed as a significant cause, unless the management proves otherwise.
Is a gratuitous transfer improper administration?
Not necessarily. If a board could not enforce compensation due to a dependent position and acted reasonably, there need not be any liability.
Assessing agreements for directors' liability
Important agreements deserve scrutiny against good governance. The legal experts at MKB Juristen map out the risks via the ContractCheck. View our expertise in corporate law or schedule an intake meeting .
