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Thursday, July 09, 2015

Directors’ Liability: A topic with sex appeal!

By Roeland Zwanikken , filed under: Civil

Yes Director’s liability has sex appeal, because the possibility to hold a managing director of a limited liability company (normally an N.V. or a B.V.) personally liable, have and always will trigger great interest from players in the corporate field, particularly managing directors and creditors

with unpaid claims that desire to pierce the corporate veil of an N.V. or an B.V. Litigation in which a creditor tries to hold a managing director personally liable for the company’s debts can easily take on a ‘personal’ dimension, and in most cases will be a highly emotional undertaking for both parties involved.

This posting gives a practical overview of the current state of Supreme Court case law in cases about personal directors’ liability.

In the well-known 2006 Supreme Court case ruling Ontvanger/Roelofsen[1], the Supreme Court clearly differentiated between two types of personal liability of a managing director:

(1) The first type (the so-called ‘Beklamel’-type): a managing director can be held personally liable if, on the moment he entered into an agreement, he knew or should have known, that the company would not be able to fulfill its obligations towards the creditor and would not be able to offer any redress. As an illustrative example, a managing director buys a brand new car “on credit” on behalf of the company, even though he knows it is very likely that the company will file for bankruptcy within soon. If the company is subsequently declared bankrupt, the creditor can hold the managing director personally liable. It is important to note that the ‘Beklamel’-type of personal liability concerns situations where the managing director lightheartedly decided to enter into agreements. In other words, it focuses on actions before and until the closing of an agreement;

(2) The second type (in Dutch: “verhaalsfrustratie”) are situations wherein the managing director is responsible for the fact that the creditors will not be able to find any options for debt-recovery. In these type of situations, the managing director, through his actions or omissions as administrator of the company, ensures creditors are no longer able to find any assets, against which they could take enforcement measures. Please note that the courts will not easily assume this type of personal liability; it is required that there are ‘additional’ wrongful circumstances. For example in a case that it can be proven, that through his actions the managing director also personally enriched himself. This second type of personal liability focuses on the actions and omissions of the managing director that take place after the company entered into an agreement;

For both types of personal liability, it is required that to establish that the managing director can be severely blamed for his actions or omissions as managing director of the company. In other words, it is not sufficient that the managing director can just be blamed for the situation, in which creditors of the company end up with unpaid debts. This raises the question, what are the reasons to put the threshold for personal liability rather high in these kind or cases? Justification can be found in the following arguments:

(i) The party that deals with the managing director directly primarily deals with the company and not with the person of the managing director;
(ii) If the bar for personal liability would not be put high, a managing director could easily be held personally liable and that is not desirable, because it would make them rather ‘defensive’ as entrepreneurs in business operations;
(iii) Only in exceptional circumstances should it be allowed to infringe upon the principle of ‘paritas creditorum’ (all creditors have equal rights to take enforcement measures against the asset of a debtor).

In 2012 many authors thought that with the handing down of the so-called ‘Spanish villa’ Supreme Court decision [2], the Supreme Court had identified a third type of directors’ (personal) liability. In this case, Van de Riet was the managing director of Van de Riet B.V. (a broker’s firm). Van de Riet gave some advice to a couple (hereinafter referred to as: “Hoffman”) who desired to buy a vacation villa in Spain. After Hoffman bought the villa, he found out that the villa was illegally built on land, where building activities were forbidden. Hoffman subsequently held Van de Riet personally liable for damages suffered. Van de Riet defended himself by saying that he had advised Hoffman ‘as a friend,’ and therefore had not entered into a brokerage-agreement with him and had not earned anything from the entire transaction or advice.

The Supreme Court ruled that Van de Riet could be held personally liable, even though it was not established that Van de Riet could be severely blamed for his actions. Based on the circumstances, Van de Riet B.V. could also be held liable, but this is beside the point here.

In a ruling from September 5, 2014[3] the Supreme Court provided clarity on the questions of how the Spanish Villa ruling should be interpreted and whether there are two or three categories of directors’ liability identified by the Supreme Court.

The Supreme Court explained that in the Spanish Villa ruling the liability claim was primarily directed against Van de Riet personally (and not against Van de Riet, in his capacity of managing director of Van de Riet B.V.). Because it was directed against him personally, a lower threshold was applicable (it was sufficient that Van de Riet could be blamed for his acts and it was not required that it was established that he could be severely blamed).

With this ruling, the Supreme Court made it clear that there are still only two categories of directors’ liability identified by the Supreme Court.

It has to be noted that the doctrine of directors’ liability is a field of the law that is very casuistic. The relevant facts and circumstance always play an important role and this renders these kind of cases to be unpredictable to some extent. In addition, it has to be noted, that it is important that a correct strategy is developed and proper choices are made as to the category/type of personal liability on which the claim will be based. Besides that, it has to be assessed whether, based on the relevant facts, it is possible to hold a person (who is also an administrator of a company) directly personally liable.

We, the lawyers of BZSE Attorneys at Law/Tax Lawyers are more than willing and ready to advise you in individual cases, to draft a tailor-made advice and to develop a proper litigation strategy, either for creditors that have unpaid claims on a company or for managing directors who have to defend themselves against a personal liability claim.

Roeland Zwanikken
Partner at BZSE Attorneys at Law/Tax lawyers

[1] ECLI:NL:HR:2006:AZ0758, HR 8 dec 2006.
[2] ECLI:NL:HR:2012:BX5881, Uitspraak, Hoge Raad, 23 11 2012.
[3] ECLI:NL:HR:2014:2628, Uitspraak, Hoge Raad (Civiele kamer), 05 09 2014.