As the representative of a legal entity, a director does not in principle act in their own name, but on behalf of that legal entity. This is why, generally speaking, a director is not personally liable for a legal entity’s operations. However, under certain circumstances, the director of a company may very well be held personally liable.
Liability such as this can arise, for example, if the director breaches their duty to keep records. This is because under Dutch law, the management of a company must keep proper records of the legal entity’s financial situation. But what happens if the director fails to meet this obligation?
Consequences of breaching the duty to keep records for individual directors
In the event of bankruptcy, in particular, a breach of the duty to keep records can have major consequences for individual directors. In such a case, the basic rule is that every director is liable for the asset deficiency if, in the three-year period prior to the bankruptcy, there is clearly a case of improper management, and this is likely a major cause of the company’s insolvency.
If a director has not complied with the duty to keep records, this clearly establishes improper management, and it is presumed – refutably or otherwise – that this improper performance of tasks is a major cause of the insolvency.
The criterion for determining whether the duty to keep records has been fulfilled is therefore significant for every director of a legal entity, and not only for directors whose areas of responsibility might include (financial) record keeping.
No case of improper performance of tasks in the event of a minor omission
The law states that a minor omission does not constitute improper performance of tasks by the management. What can be classified as a minor omission? Generally, it is considered that directors who act in good faith and with good reason are not necessarily liable for incomplete bookkeeping. The onus of proof for demonstrating this lies with the management.
Exculpation for an individual director
In order to be released from liability, a director of a company may exculpate themself under certain circumstances. This is an exception to the collective liability and is possible if clearly improper management – by the management as a whole – is established.
Exculpation entails individual directors claiming their lack of culpability, by demonstrating that no serious blame can be attributed to them, and that they were not negligent in taking measures to avert the negative consequences of the improper management. The fact that the director only played a minor role in the omission will not exculpate them.
Blenheim advises company directors
The lawyers inBlenheim’s Corporate Team have extensive experience in advising and litigating when it comes to director’s liability, imminent or otherwise. If you have any queries or need assistance, please feel free to get in touch. We are happy to help.