Directors' Liability: How to Protect Yourself and Your Business

A private or public limited company offers protection for directors, but this protection is not always watertight. As a director, you can still be held personally liable under certain circumstances. A distinction can be made between internal liability, external liability, and liability in the event of bankruptcy.

Internal accountability: careful management

As a director, it's important to perform your duties properly. In the event of improper management, the director can be held liable by the company itself. This is called internal liability.

A director can only be held liable if they make serious mistakes. The starting point is how a reasonably competent and reasonable director should have performed their duties under the circumstances. Essentially, as a director, you must always act carefully and with common sense to limit the risk of internal liability.

External liability: responsibility towards third parties

Not only the company can hold the director liable; in some cases, third parties (such as creditors) can do so as well. In that case, the director is liable for the debts alongside the company. This is called external liability.
This may be the case (for example) when the director enters into a purchase agreement with a third party, but knows in advance that the company cannot meet its obligations.

Bankruptcy liability

When a company goes bankrupt, the trustee (the person handling the bankruptcy) can hold the director liable. This is only possible if the director has performed their duties poorly and is guilty of improper performance. It is also required that the improper performance of duties was a significant cause of the bankruptcy.

The law includes two situations in which improper performance of management duties is presumed. This is primarily the case when the director fails to comply with the obligation to maintain records from which the company's financial position can be determined. Furthermore, improper performance of management duties is presumed when the director fails to file the annual accounts with the Chamber of Commerce on time. Therefore, always ensure that your records are in order and that the annual accounts are submitted to the Chamber of Commerce on time!

Conclusion

As a director, you can be held personally liable in various ways (internally, externally, or in the event of bankruptcy). Limit your liability risk by keeping your affairs in order. Ask your notary for the best approach!

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This article is taken from 'Met Recht Geregeld' (www.metrechtgeregeld.nl), a product of FBN Juristen.

This article should not be considered legal advice. FBN Lawyers and MAES Civil-Law Notaries take the utmost care in the content of these articles, but accept no liability for any incompleteness or inaccuracy of an article, nor for any consequences thereof.