Liability of a director or committee member

Mismanagement

Are you failing to perform your duties as a director properly? If so, the legal entity may hold you liable for any resulting damage. This is known as ‘internal director liability’. It can only apply in cases of ‘gross negligence’. For example, if the organisation runs into difficulties because you:

• seriously neglecting the administration of the legal entity
• taking out a loan for the legal entity at an exorbitant interest rate
• committing fraud
• take decisions without proper preparation, which have significant financial consequences for the legal entity

What is the difference between internal and external directors’ liability?

In the case of internal directors’ liability, the legal entity holds you liable. This may also include the shareholders or other directors.

You may also be personally liable to third parties. These include, for example, the legal entity’s creditors. This is known as ‘external directors’ liability’. For example, if you have entered into a contract knowing that the legal entity is unable to fulfil it. The creditor may then hold you personally liable.

Liability in the event of bankruptcy

If a legal entity goes bankrupt due to your improper management as a director, for example, because the accounts are not in order, or the financial statements were submitted late, you may be held personally liable for the debts, to the extent that the legal entity is unable to pay these debts in bankruptcy.

Payment issues with the Netherlands Tax Administration or the UWV: report them immediately

Do you manage a legal entity that pays corporate income tax? And are you unable to pay your tax bills to the Netherlands Tax Administration, or your social security contributions to the UWV on time? This is known as inability to pay (betalingsonmacht) You must report this to the Tax Administration as soon as possible (within 2 weeks). If you fail to do so, you may be held liable for unpaid taxes and contributions.

If the legal entity owes the Tax Administration or UWV money due to your mismanagement, you will have to pay for them out of your private assets.

Not yet registered at Chamber of Commerce KVK

Has the legal entity been officially incorporated through a civil-law notary but not been registered with KVK? If so, as a director, you may be held personally liable for the actions of and on behalf of the legal entity. This applies even if the legal entity is registered as ‘under the process of incorporation’ (in formatie, i.o.).

Informal association

An informal association is an association that has not been incorporated through a civil-law notary. Both the informal association and its board are liable for the association’s financial obligations.

Acting as a cosigner for a loan

Sometimes the bank will ask you to act as a cosigner for a loan, or to sign a declaration of personal liability. This means you will also be liable for the debt if the legal entity is unable to pay.

Liability for unlawful acts

An unlawful act means that you do something or fail to do something that you should not have done. This causes harm to a person or organisation. For example, your action was contrary to:

• what you are required to do by law
• the normal way of interacting with one another
• the rights of another person

Has a person or organisation suffered damage as a result of a tort committed by you? If so, that person or organisation can hold you liable.

Example

You buy something for the legal entity, whilst knowing that the organisation cannot afford it. The seller can then hold you personally liable for the outstanding debt.

Payment test required for distributions by an BV

Do you wish to make a distribution from the business, for example to pay dividends to shareholders? Then the board must check 2 things:

• whether sufficient cash remains, in addition to the reserves required by the articles of association and the law (balance sheet test)
• whether the business can still pay its current liabilities for approximately one year following the distribution (distribution test)

If you approve a distribution when this is not actually permitted, you may be held personally liable for the business’s shortfalls.

Director’s liability insurance

Director’s liability insurance (bestuurdersaansprakelijkheidsverzekering) covers you in certain circumstances against the risks of personal liability. For example, in the event of a claim for damages arising from your failure to perform your duties properly, or in the event of an error or omission by one of your fellow directors. The insurance does not usually cover damage caused deliberately through fraud or abuse. Always check the policy to find out what is covered.

How long does directors’ liability remain in force?

After five years, a person or organisation can no longer hold a managing director liable for damages (statute of limitations). This period is calculated from the moment the person or organisation became aware of the damage and who is liable for it.

How can you avoid personal liability as a (managing) director?

You must comply with the law and do what the law requires, such as:

• paying taxes and contributions on time
• keeping proper records and submitting financial statements on time
• only making payments after a payment assessment
• not doing anything that is prohibited by the articles of association
• not entering into contracts that the organisation cannot fulfil

Is the business or organisation in trouble? Take action in good time or seek advice from a legal expert or solicitor.