Director, but not a decision-maker of the company: stay alert!

But be careful: even if you are not the one shaping policy, you remain responsible as a director. Passivity is no protection against liability for manifestly improper management.

Directors’ liability

In the event of insolvency, the insolvency practitioner examines whether the board has manifestly improperly performed its duties and whether this is an important cause of the insolvency. If so, all directors are jointly and severally liable for the shortfall in the estate (Article 2:248(1) Dutch Civil Code).

A director may exculpate himself if he can demonstrate that:

• the improper management is not attributable to him; and
• he was not negligent in taking measures to avert the consequences (Article 2:248(3) Dutch Civil Code).

Case law: no successful defence of exculpation

In a recent judgment of the District Court of Overijssel, a son incorporated a company for his father, who had gone personally bankrupt. The son became a statutory director, but left policy entirely to his father. The company entered into obligations it could not fulfil and was eventually declared bankrupt. The insolvency practitioner held the son liable for the shortfall of more than €657,000. His reliance on exculpation was rejected: he had not exercised any effective supervision and had failed to intervene to avert the adverse consequences of the policy.

Admittedly, this is an extreme situation in which it is obvious that the director would not be entitled to rely on exculpation. But it clearly shows that if, as a director, you fail to exercise sufficient oversight and do not take action to avert the adverse consequences of your fellow director’s policy, this can carry significant financial risks. Below is an overview of the do’s and don’ts for directors who are more remote from day-to-day decision-making.

Do’s for directors who do not determine policy

• Exercise effective oversight of the conduct of fellow directors.
• Intervene in time when there are signs of improper management.
• Document your involvement and your efforts to limit risks.
• Stay alert to financial obligations being entered into on behalf of the company.
• Resign if you cannot properly fulfil your duties.
• Seek legal advice if in doubt about your position or responsibilities.

Don’ts for directors who do not determine policy

• Leave policy entirely to others without oversight.
• Assume you have a free pass because you are “only a director on paper”.
• Cooperate in structures that in practice facilitate improper management.
• Ignore your responsibility when financial or legal risks arise.
• Fail to take measures in the event of misconduct.
• Rely blindly on exculpation without evidence of active involvement.

Advice from GMW lawyers

Our lawyers, specialising in company law and insolvency, advise directors on their legal position and on how a director can effectively intervene in policy. We also assist directors who are held liable by insolvency practitioners or creditors because of insufficient involvement in policy, or because of the policy implemented.

Do you have questions about your position, or are you perhaps being held liable as a director? Please feel free to contact us. We will be happy to advise you.