This issue contains a general outline of the duties and civil liability of managing directors of Dutch corporations, i.e. corporations limited by shares (naamloze vennootschappen) and private corporations with limited liability (besloten vennootschappen met beperkte aansprakelijkheid). We do not address the position of members of the Board of Supervisory Directors in this issue.
2. DUTIES AND RESPONSIBILITY OF MANAGING DIRECTORS
All Dutch corporations have a management board. The management board has the function of managing the corporation, i.e. making policy and conducting the day-to-day management of the corporation. It also represents the corporation in dealings with third parties. The management board consists of one or more individuals or legal persons of any nationality.
The duties of the management board are of a collective nature. If the management board has more than one member, the managing director must decide collectively what the main lines of their management policy will be. However, certain tasks may be assigned to individual members by virtue of the articles of association, internal board regulations or informal agreements. In principle, the management board adopts its resolutions by an absolute majority. As a general rule, collective responsibility results in joint and several liability (see below under 3).
The management board must act in furtherance of the corporate objects (described in the articles of association) and interests, such as the interests of the shareholders, the employees and the creditors of the corporation.
Specific duties assigned to the management board are:
- to keep books to account for the corporation's financial position
- to draw up and submit the annual accounts and annual report to the shareholders' meeting (and to the works council, if present); and
- to file the annual accounts and annual report, including a statement of a certified accountant concerning its audit of the annual accounts, with the Chamber of Commerce.
(Note: corporations that qualify as "small" are exempt from drawing up an annual report, unless they (must) have a works council, and submitting their annual accounts to audits.)
3. CIVIL LIABILITY OF MANAGING DIRECTORS
Liability may occur where there is a breach of duty, damage and a causal connection between the breach of duty and the damage. If the managing director is a legal entity, the liability rests not only upon that entity, but also jointly and severally upon each managing director of that entity at the time liability arises.
A distinction can be made between liability towards the corporation and liability towards third parties. Examples of third parties are: creditors, employees, persons towards whom the corporation has acted tortuously, the tax authorities or a trustee in bankruptcy.
Liability towards the corporation
Liability towards the corporation may be based on the following legal grounds:
a) improper performance of duties (see below);
b) infringement of capitalization provisions;
c) responsibility for an unjustified policy or a dissatisfactory cause of affairs in the context of inquiry proceedings.
In practice, improper performance of duties is by far the most important ground for internal liability.
Improper performance of duties
Each managing director is jointly and severally liable towards the corporation in case of improper management. "Improper management" means, broadly speaking, serious negligence, i.e. if no reasonable managing director would have made such decision or taken such action.
Improper performance of duties may consist of acting (or refraining from acting) in violation of the law or the articles of association or acting in a clearly unreasonable way. Examples are:
- acts in conflict with the corporate objects or interests;
- creditors' fraud;
- improper bookkeeping;
- acts contrary to a board resolution or, under certain circumstances, without a board resolution or without the requisite approval of the supervisory board or shareholders' meeting;
- implementing, without proper preparation, decisions that will have far-reaching financial consequences;
- failing to take proper and timely precautions against clearly foreseeable risks;
- neglecting personnel policy and employee relations to such an extent that unrest and strikes occur;
- failing to investigate the creditworthiness of contract partners, or prolonging credit for an excessive period.
A managing director may avoid liability by proving (i) that the shortcoming concerns a matter that does not fall within his field of activity, or (ii) that the shortcoming is not attributable to him and that he has not breached a duty to take measures to prevent its consequences.
Managing directors can be released from internal liability upon discharge (d‚charge) granted by the competent corporate body. A discharge granted on the basis of specific documents (e.g. by the shareholders' meeting in connection with the adoption of the annual accounts) does not cover facts which do not appear from these documents. In addition, under certain circumstances, the principle of reasonableness and fairness may prevent reliance on a discharge.
Liability Towards Third Parties
Liability towards third parties may be based, among others, on the following grounds:
a) improper performance of duties which have lead to the bankruptcy of the corporation (see below);
b) improper performance of duties which have lead to the inability of the corporation to pay its taxes, social security premiums or contributions to mandatory pension funds (see below);
c) defects in the incorporation;
d) violation of the rules relating to registration with the Commercial Register;
e) violation of the rules relating to pre-incorporation transactions;
f) infringement of capitalization provisions;
g) misleading presentation of facts in the annual accounts, interim accounts or annual reports;
h) tort, e.g. wrongful trading, creditors' fraud, environmental pollution and publication of a misleading prospectus.
To date, the grounds under a), b) and h) have proven to be the most important bases of liability. The first two grounds are discussed below.
Liability In Bankruptcy
In bankruptcy, each managing director is jointly and severally liable to the bankruptcy estate, if it is (i) evident that the management board has performed its duties improperly, and (ii) plausible that this was an important cause of the bankruptcy. The extent of this liability amounts to the liquidation deficit of the corporation.
As to the criterion "evidently improper performance of duties", reference is made to the examples mentioned above regarding internal liability.
A managing director may avoid liability by proving that the improper management is not attributable to him and that he has not breached the duty to take measures to prevent its consequences. Special importance is attached to the duties of proper bookkeeping and filing the annual accounts (see above under 2). If the management board failed to fulfil either of these duties, it is presumed (i) that the management board has improperly performed its duties, and (ii) that this improper management was an important cause of the bankruptcy. In this case, the managing director must prove that the improper management did not constitute an important cause of the bankruptcy, in order to avoid liability.
The above provisions apply equally to foreign corporations, provided that those are subject to Dutch corporate income tax. In such a case, not only the managing directors of that corporation, but also the persons charged with the management of the activities performed in the Netherlands are liable.
Liability For Tax Debts, Social Security Premiums And Contributions To Mandatory Pension Funds
Each managing director is jointly and severally liable for -inter alia- wage tax, VAT, social security premiums and contributions to mandatory pension funds, if the corporation is in default of payment due to evidently improper management.
Examples of evidently improper management are: concealing the payment of wages, intentionally and systematically filing of incorrect tax returns, improper bookkeeping combined with failure to file tax returns or filing of incorrect returns.
Special importance is attached to the obligation of the corporation (and each managing director) to timely notify the competent tax authorities in case of its inability to pay the above taxes or premiums. If proper notice is given, a managing director may escape liability if he proves that he himself was not negligent. In the absence of proper notice, a managing director may avoid liability only by proving that the failure to give notice as well as the failure to pay the amount due are not attributable to him. The first condition shall be met in exceptional cases only. As a rule, neither unfamiliarity with the obligation to notify, or misunderstandings between the managing directors, nor a division of responsibilities will exonerate the managing director from liability.
With respect to taxes, premiums or contributions due by a foreign corporation, the above provisions apply equally to the manager of the branch in the Netherlands, the permanent representative who resides or is domiciled in the Netherlands, or the person who is in charge of the management of the activities performed in the Netherlands.
Our next issue deals with corporate governance.
The contents of this article are intended to provide a general outline of the subject matter only, and should not be taken or construed as advice in any particular matter.
For further information, please contact Ewout J. Stumphius at Loeff Claeys Verbeke, Rotterdam, tel. 31.10.4034777, fax. 31.10.4149388.
