Exercising a directorship in a company is not without risks. Indeed, directors can be held liable for the damage they cause to the company or to third parties as a result of a violation or error in the execution of their mandate.
Moreover, due to a recent change in the law, contracting parties of a corporation will soon, be able to hold the directors of that company directly liable more quickly. Adequate directors' liability insurance is becoming more important than ever.
When is a director liable?
Each director can be held liable for, among other things:
- ordinary mismanagement: these are errors committed in the performance of his or her duties as a director, such as the violation of a standard of conduct or an error of policy. However, the director will only be liable for "decisions, acts or conduct that are manifestly outside the range within which normally prudent and careful directors, placed in the same circumstances, might reasonably differ."
- a violation of the provisions of the Companies and Associations Code (CPC) or the company's articles of association (e.g., late filing of annual accounts);
- a crime against third parties or against the company, e.g. theft of company property;
- obtaining an undue financial benefit when the director in question had a conflict of interest;
- tax debts of the company or criminal offenses.
There are also specific liability grounds for directors in bankruptcy. Among other things, a director can be held liable for all or part of the debts of a bankrupt company in the event of:
- apparently gross errors that contributed to the company's bankruptcy;
- 'wrongfull trading,' namely, the manifestly unreasonable continuation of an apparently salvageable business, with no reasonable chance of recovery.
Note that not only formally appointed directors risk this liability on the aforementioned grounds. Factual directors - these are the directors who do not have a formal mandate but still observe the board in practice - should also be vigilant.
When a director is effectively held liable, the amounts of liability can be limited according to the size of the company. This is called the "cap" on liability, although in practice we find that it often remains dead letter. A director can take out insurance for this purpose.
By whom can directors be held liable?
From the entry into force of the new non-contractual liability law (presumably it will be 01/01/2025), directors will henceforth also be able to be held directly liable by the company's contracting parties, if they can prove fault on the part of the director as a result of which they have suffered damage. Previously, this was in principle not possible. Again, although that director will only be liable for "decisions, acts or conduct manifestly outside the range within which normally prudent and diligent directors, placed in the same circumstances, could reasonably disagree."
Moreover, note that a director cannot agree with his company that that company will assume the liability of its director. In addition, there is ambiguity as to whether companies can stipulate in an agreement that they will not hold each other's directors liable. So we can safely stipulate this in agreements, but there remains a risk that this provision will be overturned by the court in the event of a dispute.
Since directors can now be sued more quickly, we recommend that all directors scrutinize their liability insurance (or have it scrutinized), taking into account these new provisions of the law.
What if the director was discharged?
If the shareholders decide at the annual general meeting to grant discharge to the director, then in principle this director can no longer be held liable by the company for any mistakes this director may have made during the past year. This discharge is irrevocable. So be careful when discharging directors in case of conflict within the company.
The discharge relates only to directors' liability that can be claimed by the company. Thus, third parties are still entitled to bring a liability claim against the director if they can prove fault, damage and causal link.
If a director resigns during the fiscal year, we recommend that the resigning director request provisional discharge from shareholders at the special general meeting that decides on his resignation. However, this discharge only covers errors expressly reported to the general meeting for the period between the date of the last completed fiscal year and the date of resignation. It is therefore important to additionally request final discharge at the annual general meeting that decides on the approval of the financial statements for the fiscal year in which that resigning director was still a director.
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