It is widely known that corporations have a limited responsibility, that is, that the corporation has its own, separate capital, which can be accessed in case of debts toward third parties. In the case of bankruptcy, however, the directors of a corporation can be held personally liable by the bankruptcy trustees, if maladministration can be demonstrated. In such a case, holding the director personally liable is an exception to the general rule stated in the opening paragraph.
Personal liability in case of maladministration
Generally, it is very hard (for the bankruptcy trustees) to prove maladministration by the company’s director(s). However, this burden of proof is shifted in two specific cases.
According to Dutch company law, a company director is deemed personally liable on the grounds of maladministration in two cases: if the respective company’s books were not kept in compliance with the tax law in force and if the company’s annual reports and accounts were not filed on time with the Chamber of Commerce. In such cases, in order to avoid being held personally liable, it is the director who has to bring the conclusive evidence, demonstrating that the bankruptcy was not caused by his maladministration, but that is has occurred due to external factors. Needless to say, that under these circumstances a director would have a very hard time demonstrating his innocence.
The situation described above is regulated by the Dutch Civil Code. However, the issue of personal liability in the case of bankruptcy is worth exploring a bit further, given the high number of foreign companies conducting their business in The Netherlands and Dutch companies employing a non-Dutch director.
What are the rules applicable to foreign corporations?
Foreign companies active in The Netherlands fall under the same regime as Dutch companies. The Wet Conflictenrecht Corporaties (WCC, art 5) – the Corporations (Conflict of Laws) Act, dating from 1 January 1998, stipulates that, in case of bankruptcy, the rules applicable to the personal liability of the director also apply to directors of foreign companies active in The Netherlands. A Dutch judge can issue a liquidation order, if the foreign company – an Ltd, for example – is active in The Netherlands, has an office in The Netherlands and is subject to Dutch corporation tax.
What are the rules applicable to non-Dutch directors?
Similar to the case of a Dutch director, a non-Dutch director of a Dutch company that has filed for bankruptcy is personally liable, if there is evidence of serious maladministration. According to Dutch law, a Belgian director of a bankrupt Dutch B.V can be held personally liable, just like any Dutch director would be. However, things get more complicated, if the Dutch B.V. is managed by a Belgian corporation (BVBA), headed by a Belgian national. In a similar case, the Supreme Court of The Netherlands has recently ruled (18 March 2011, http://j.mp/dYoFS2) that Dutch law is applicable, both to the Belgian BVBA ( the director of the bankrupt B.V.), as well as its Belgian director (director of the BVBA). This ruling is based on article 3 of the WCC, stipulating that the issue of personal liability, next to the issue of corporate liability of the bankrupt company itself, is to be decided by the law that is applicable to the bankrupt company. Since the bankrupt company was set up according to Dutch law, Dutch law will be applicable to its director as well, in this case, the Belgian BVBA. The Belgian director of the Belgian BVBA can also be held personally liable, since article 2:11 of the Dutch Civil Code pronounces the director of the legal entity, which formally directed the bankrupt company, to be equally liable. According to the Supreme Court, this is a rule that governs the internal relationship of the bankrupt Dutch company, as it implies a direct liability of the Belgian director towards the Dutch company, thus bypassing the Belgian BVBA. Therefore, the Belgian BVBA has nothing to do with the issue of liability.
If you have a question about directors’ liability, or wish to discuss your situation, please contact me.