Maxim Hodak discusses the pitfalls of directors' and shareholders' liability in the Dutch corporate law

Directors and shareholders play an important role in successes and failures of a company. Attorney-at-law Maxim Hodak foresees increase in bankruptcies in view of the impending economic recession.

By law, the board of directors performs legal acts, such as entering into contracts, acquiring property and debt, or initiating lawsuits. Generally, directors of the Dutch private limited company (BV) are not personally liable for these acts with their private assets. Sometimes directors are accused of mismanagement and are liable with their personal assets.

The risk of personal liability always exists. There are two main types: internal and external liabilities. External liability holds the director liable towards third parties (e.g., suppliers and customers). Internal liability is responsibility to the company for negligence or mismanagement.

The Dutch Civil Code considers mismanagement responsibilities such as activities, their nature, risks, division of tasks within the board and administration. The use of information for decision making and assesment also affects the outcome of the case. Activities contradicting the articles of association can lead to liability and even director's resignation.

Actions that can be considered as mismanagement is extensive. It includes major decisions, acts and finances such as withdrawal of company assets, using them as private, mixing private and corporate matters and competing with the company. Unauthorized binding of the company to third parties, large financial risks and decisions with far-reaching consequences can be regarded as improper management. Transactions exceeding the financial resources of the company can be treated as irresponsible and may lead to liabilities. In addition, thin capitalization, debt accumulation, poor credit monitoring and insurance misuse can be seen as mismanagement.

The entire board is responsible for maladministration by law. Sometimes, directors can 'excuse' (exculpate) themselves by proving the accusations to be wrongful and demonstrating how they attemped to prevent mismanagement.

The director is expected to oppose any decision he does not support and limit the consequences of maladministration. He should submit to writing that he has warned about possible negative consequences and describe undertaken preventive measures. In some cases, directors may be forced to resign to avoid liability if the board ignores the warning. Directors are expected to be fully informed of all the decisions, especially financial ones. Only in some cases can they avoid personal liability for being misinformed.

Shareholders can also be personally liable for their actions. Their obligations include: legal; obligations under the articles of association and shareholders' agreement. The articles of incorporation may extend the liability of shareholders and require personal liability for the debts of the company in the case of bankruptcy.

Shareholders can be accused of wrongdoing by selling shares to third parties. Especially, if the transfer results in the company being unable to pay its creditors. In addition, shareholders can instruct directors, unless these instructions contradict the interests of the company or the articles of association. Despite that, shareholders can't assume the role of director. Otherwise, they become subject to directors' liability.

Although a company is liable for damage resulting from its actions, directors and shareholders can also be personally liable. Failure to comply with legal obligations can lead to liability with personal assets. Shareholders should adhere to the articles of association and the agreement. When shareholders unconsciously act as directors, they run the risk of directors' liability. To limit risks, consult a lawyer in due time.

Contact Maxim Hodak for legal advisory via https://hodak.nl.