In The Netherlands, the most commonly used business entities are the private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid or B.V.) and the public company with limited liability (naamloze vennootschap or N.V.).
Both are limited liability companies, which means that in principle, its management board members (and its incorporators, shareholders and supervisory board members) are not personally liable for liabilities of the B.V. or N.V. towards third parties (‘external liability”) or towards the company for the manner in which they have discharged their duties (“internal liability”).
In this blog, I will briefly discuss the personal liability of managing directors of a Dutch limited liability company towards third parties.
Limitation of personal liability of directors Under Dutch law
The rationale behind the limitation of liability of managing directors of a Dutch limited liability company towards third parties is twofold:
- It is in the interest of the company that its managing directors are not too cautious in the performance of their duties. Part of doing business is taking risks. Furthermore, managing directors are sometimes forced to take snap decisions in difficult situations. It would be detrimental to the company if its managing director(s) would in that case always take an approach that is too defensive.
- In fulfilling his duties, a managing director acts on behalf of the company, and not for his own account. The actions of a managing director should therefore firstly be attributed to the company. If a third party enters into an agreement with a company, he is (or should be) aware of that fact.
There are circumstances under which a managing director of a Dutch limited liability company may, however, be personally liable towards third parties on the grounds of tort. The question of personal liability of a director most often comes into play when creditors of the company are left unpaid. In a recent decision, the Supreme Court has affirmed that personal liability of a managing director for liabilities of a company towards third parties will only arise if that third party has been prejudiced by the company and ‘serious blame’ can be attributed to the managing director in respect of those damages.
Dutch law on personal liability of a director for unpaid debts of the company
Whether such ‘serious blame’ can be attributed depends on the nature and severity of the violation of the standards that the director should observe and the other relevant circumstances of the case. In case of unpaid creditors, the Supreme Court has developed a specific criterion for personal liability of the managing director.
Personal liability of a director for entering into contracts
A managing director is liable if he has entered into an agreement on behalf of the company while he knew – or reasonable should have known – that the company would be unable to perform its obligations under the agreement and would not be able to provide recourse for the damages suffered as a result of that breach of contract. Other instances in which a director may be liable for damages suffered by a creditor are the case in which a director permits or deliberately causes a company to default on its contractual obligations or in which a company selectively pays its creditors. Whether personal liability in such a case arises depends on the circumstances of the case.
Advice on personal liability of a director under Dutch law
If you seek advice on personal liability of a director under Dutch law, please feel free to contact: