Directors’ Liability in a Start-up

Start-ups often emerge quickly and exit the market just as fast. This raises the question of how soon a director can be held liable. To date, there have been relatively few court rulings on this topic.

On 9 October 2024, the District Court of Overijssel issued a judgment on this matter. In this case, a liquidator held the directors of a start-up personally liable, arguing that they had launched the company recklessly and without sufficient financial means.

Directors’ liability

The court first outlined some general principles regarding directors’ liability. It ruled that in performing their duties, directors must act in the interests of the company. They must also carefully consider the interests of all parties involved. The interests of stakeholders must not be disproportionately harmed.

The court further noted that the Dutch Supreme Court (Hoge Raad) has established that there is improper management when a director unmistakably and significantly fails in their duties, and can be seriously blamed for doing so. This must be assessed based on all the circumstances of the case, including, for example, the nature of the company’s activities, the risks involved, the division of tasks within the board, and the available information.

Start-up context

In this case, there was a business plan and associated financing, but the financing was not secured before the business commenced operations. How should this be assessed?

Here, the court held that the directors were not liable. After all, the success of a start-up is never guaranteed in advance. There was a business plan and a financing arrangement. The fact that the financing had not yet been fully arranged was not sufficient reason, in the court’s view, to hold the directors personally liable.

In this case, the directors had not disproportionately harmed the interests of the creditors. The trade creditors had been paid (out of the directors’ own pockets), and the lease agreement had been terminated in consultation with the landlord. Furthermore, the investors had been informed by the directors that they were investing in a start-up, and were therefore aware of the risks, including the possibility that their investment might not be repaid.

It appears that having a solid business plan is crucial. Good financing arrangements are equally important. A viable and executable plan that carefully considers all creditors and ensures proper (pre-contractual) information provision is key. How directors’ liability in start-ups will be further assessed will become clearer as more case law develops.

More information

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