Main rule in Dutch law is that a director or an officer of a legal entity is not personally liable for the debts of the legal entity. However, situations can arise in which this limitation of liability will be breached (‘piercing the corporate veil’).
In our legal system we distinguish internal liability and external liability.
Internal liability embraces liability to other bodies of the entity such as the General Meeting of Shareholders. A director or officer is obliged towards the legal entity to perform its duties properly. He is responsible for the general state of affairs and is fully liable in case of mismanagement. The latter charge can only be refuted in case, no serious accusations can be made to the director or officer (also in view of the tasks assigned to others) and he has not been negligent in taking measures to avert the consequences of mismanagement.
External liability embraces liability to third parties outside the legal entity. Once again, our legal system distinguishes two situations: the normal situation and the situation in case of a bankruptcy.
In the normal situation a director or officer is legally liable, besides the liability of the legal entity itself, to third parties with whom the legal entity has traded if the director or officer has committed an unlawful act (onrechtmatige daad, art. 6:162 BW) against that third party. The director or officer must then be personally blameworthy for serious misconduct. Various criteria have been developed for this in Dutch case law. In this situation an unlawful act exists if the director or officer knew or ought to have known when entering into an agreement, that the legal entity would not be able to meet its obligations under the agreement and that the legal entity would not provide sufficient opportunity for recovery. Another situation which can result in an unlawful act is when the director or officer deliberately prevents the legal entity from fulfilling its obligations.
In case of a bankruptcy a director or officer is liable for the full deficit if the trustee asserts and proves that the board has manifestly improperly performed its duties and it is plausible that it is an important cause of the bankruptcy. Importantly, where there is no proper accounting or administration or when the financial statements and/or the annual report are not published in time, it is assumed that there is mismanagement. In that case, mismanagement is also presumed to be the cause of the bankruptcy. The director or officer can only escape liability by demonstrating a plausible cause for the bankruptcy other than mismanagement.
Apart from these general liabilities, numerous special liabilities are regulated in specific law. One of them should be mentioned here specifically. It concerns the case where the board executes a resolution to dividend distribution while it knew or should reasonably have foreseen that the entity would no longer be able to pay its debts after the distribution.
Legal entity as director
Another important point is that for directors’ and officers’ liability, one can look through the legal entity. That is, if a legal entity is the director, liability will also fall on the director of that legal entity, and so on. This is possible until a natural person is found, so that as far as liability concerned, a natural person cannot hide behind a legal entity as director.
There is much more to say about directors’ liability in the Netherlands but if you are or will be dealing with it and would like to have more information about it, please contact my office by phone or e-mail.