Directors' liability

Directors' liability

The basic principle in the Dutch legal system is that a company with legal personality has separate assets, as a result of which the owners and/or directors cannot be held liable with their private assets for the debts of the legal entity. An exception to this is directors' liability.

As a director, supervisor, or commissioner of an organization, one can be held personally liable in certain cases. Consequently, most directors take out directors' and officers' liability insurance. However, it is possible that no directors' and officers' liability insurance has been taken out or that the dispute in question is excluded in the policy conditions. Directors' and officers' liability can extend to the entire private estate. Such liability is often established when a director acts in a manner that is seriously reprehensible. Furthermore, late payment of tax debts can result in directors' and officers' liability. Finally, directors face an increased risk just before or during bankruptcy.

Directors' liability comes in several varieties:

– Internal directors' liability

Internal directors' liability concerns liability for improper performance of duties. Improper performance of duties includes acting contrary to the company's own articles of association or impermissible conflicts of interest. To prevent directors from frequently being held internally liable for damages to the company, the law has included an additional safeguard to protect them. In addition to improper performance of duties, there must also be a 'serious reproach'.

– Liable towards creditors in bankruptcy

Director(s) of a legal entity can be held liable for all outstanding debts in bankruptcy. If the trustee is of the opinion that the board has performed its duties 'manifestly improperly' and it is plausible that the 'improper performance of duties' is the cause of the bankruptcy, the trustee may institute a claim against the board. Improper performance of duties may, for example, occur if the company's records are defective.

– Liable towards third parties

Director(s) of a legal entity may be held personally liable by third parties on the grounds of tort. If a third party suffers damage because a director enters into an obligation on behalf of the legal entity which the director knew or ought to have known could not be fulfilled, and that director can be held 'personally seriously at fault', that director may be held personally liable for the damage caused.

We have the knowledge and expertise to assume diverse roles: from advice to dispute resolution. We have an experienced team of lawyers and legal experts in the field of directors' liability. Contact us to discuss the possibilities.

Legal basis for directors' liability

The forms of directors' liability described above each have their own statutory basis. In practice, it is important to clearly distinguish these bases, as different requirements and burdens of proof apply to each basis.

• Internal liability – Article 2:9 of the Dutch Civil Code. Pursuant to Article 2:9 of the Dutch Civil Code, every director is obliged towards the legal entity to properly perform his duties. Only the company itself (or, in the event of bankruptcy, the bankruptcy trustee) can hold the director liable on this basis. In addition to improper management, a serious reproach required.
• Bankruptcy liability – Article 2:248 of the Dutch Civil Code (and Article 2:138 of the Dutch Civil Code for the public limited company). In the event of bankruptcy, every director is jointly and severally liable for the deficit in the bankruptcy estate if the board manifestly performed its duties improperly and it is plausible that this is a significant cause of the bankruptcy. Failure to comply with the accounting obligation (Article 2:10 of the Dutch Civil Code) or the obligation to publish the annual accounts (Article 2:394 of the Dutch Civil Code) leads to a statutory presumption of proof to the detriment of the board.
• External liability – Article 6:162 of the Dutch Civil Code. Creditors and other third parties may hold a director personally liable for tortious conduct. The well-known Beklamel standard holds that a director is liable when he enters into an obligation on behalf of the company while knowing or ought to have known that the company would not be able to fulfill it and would offer no recourse.

Whether it concerns an international group or the baker on the corner: our lawyers and in-house counsel translate these principles into your specific situation and assess the actual strength of a liability claim.

Fiscal directors' liability and notification of inability to pay

A common – and often underestimated – basis is fiscal director liability. Under the Collection Act 1990, a director can be held jointly and severally liable for unpaid payroll taxes, VAT, and certain social security contributions. The key lies in reporting the inability to pay: as soon as the company is unable to pay these taxes or contributions, this must be reported to the Tax and Customs Administration in a timely manner (in principle, within two weeks of the day on which the amounts due should have been paid). If no report is made, or if it is not made in a timely manner, a legal presumption of manifestly improper management arises that the director can virtually no longer refute. A correct and timely report is therefore one of the most important preventive measures a director can take.

The role of directors' and officers' liability insurance and the recovery of damages

Within our expertise in Liability, Damages, and Insurance, we examine not only the liability itself but also the insurance and the actual recovery or averting of damages. Many directors take out directors' and officers' liability insurance (also known as D&O insurance). Such a policy generally covers claims and defense costs but includes exclusions—such as intent, fraud, or consciously reckless conduct—and coverage limits. We assess whether a claim falls under the policy conditions, conduct coverage discussions with the insurer if necessary, and assist both directors facing legal action and parties seeking to recover damages from a director. Because a liability claim often affects the entire private estate and directors can be jointly and severally liable in the case of multiple directors, early legal advice almost always pays off.

Preventing directors' liability

Prevention is better than litigation. With a few targeted measures, a director significantly reduces his risk:

• Maintain proper records and comply with accounting and publication obligations.
• Pay taxes and contributions on time and notify the Tax and Customs Administration immediately if you are facing imminent insolvency.
• Document important decisions, conduct a liquidity forecast, and apply the statutory benefit test to distributions.
• document the discharge, indemnification , and division of duties among directors—after all, discharge only protects against internal claims regarding what was known at the time of the decision-making.
• Be extra vigilant in the period before and during (imminent) bankruptcy; consult our insolvency and corporate law.

Frequently asked questions about directors' liability

When am I personally liable as a director?

In principle, the legal entity is liable and not the director personally. You only become personally liable if you seriously blamed , for example in the case of improper management (Article 2:9 of the Dutch Civil Code), manifestly improper management in bankruptcy (Article 2:248 of the Dutch Civil Code), unlawful conduct towards third parties (Article 6:162 of the Dutch Civil Code), or failure to report insolvency in a timely manner.

Does liability apply to all directors simultaneously?

Often, yes. Directors' liability is in many cases joint and several: an individual director can be held liable for the entire amount. A clear division of duties and exoneration can offer a solution in specific cases.

Does my directors' and officers' liability insurance cover everything?

No. D&O insurance covers a lot, but not everything. Intentional acts, fraud, and willfully reckless conduct are generally excluded, and coverage limits apply. Have your claim assessed in a timely manner to determine whether it falls under the policy.

Who are you there for?

For every director, supervisory board member, or regulator – from an international corporation to the baker on the corner. Our mixed teams of lawyers and in-house counsel provide preventative advice and assist you in liability proceedings.