Directors' Liability: Risks for BV Directors

One of the main reasons for setting up a BV is to protect your personal assets. A BV is a legal entity with its own liability. However, this protection is not absolute. As a director, you can be held personally liable under certain circumstances. In this article, we explain when this is the case.

The starting point: limited liability

With a BV, in principle, only the company is liable for its debts. If the BV goes bankrupt, shareholders lose their investment but nothing more. Directors also run no personal risk in principle.

This is the 'legal shield' that the BV provides. But this shield can be pierced in cases of mismanagement or unlawful acts.

Internal liability (towards the BV)

Directors can be liable to the company itself. This is called internal liability. The legal basis is Article 2:9 of the Dutch Civil Code (BW): every director is obliged to properly perform their duties.

When does mismanagement occur?

Improper performance of duties requires serious culpability. Not every mistake or misjudgement leads to liability. A director has discretion (the 'business judgment rule'). But there are limits:

• Acting in contravention of the articles of association
• Neglecting administrative duties
• Taking irresponsible risks without adequate preparation
• Conflict of interest
• Self-enrichment at the expense of the BV

In the case of a multi-member board, collective responsibility applies. Each director is, in principle, liable for the full amount, unless they can prove that they are not to blame and have not been negligent in taking measures.

External liability (towards third parties)

Directors can also be liable to third parties, such as creditors, contracting parties, or the Tax and Customs Administration. This can be on various grounds:

1. Tort (unlawful act) (6:162 BW)

If a director personally commits an unlawful act, they can be held liable. Two situations are common:

• Unwillingness to pay: The director causes the BV to fail to meet its obligations, even though payment could have been made.
• Selective payment: The director pays some creditors but not others, without good reason.

2. The Beklamel standard

A director acts unlawfully if they enter into obligations on behalf of the BV which they know or should understand the BV cannot meet and for which it offers no recourse. You must therefore have realistic expectations about the BV's financial capabilities.

3. Actio Pauliana (fraudulent conveyance)

If, shortly before bankruptcy, the director quickly gives away assets or sells them at too low a price, the director can be held personally culpable for this.

Liability in the event of bankruptcy

In the event of a BV's bankruptcy, the receiver investigates whether there is any directors' liability. The law has special provisions for this:

Manifestly improper management (2:248 BW)

If the board has manifestly improperly performed its duties and this is a major cause of the bankruptcy, the board is jointly and severally liable for the deficit in the bankruptcy. The 'deficit' is the difference between debts and proceeds.

There is a presumption of evidence: if the duty to keep records or the duty to publish accounts has not been fulfilled, it is presumed that there has been improper management and that this is a major cause of the bankruptcy. The burden of proof then shifts to the director.

Notification of inability to pay (Tax and Customs Administration)

If the BV is unable to pay tax debts or social security contributions, you must report this to the Tax and Customs Administration in a timely manner. If you fail to do so, or do so too late, you as a director are personally liable for these debts.

Tax liability

Directors can be held personally liable for the BV's tax debts:

• Payroll taxes: Failure to remit withheld wage tax and social security contributions
• VAT: Failure to remit VAT
• Corporation tax: In certain cases

The duty to notify is crucial. Report the inability to pay within two weeks of it arising. Use the form provided by the Tax and Customs Administration for this purpose.

How can you protect yourself?

As a director, you can take several measures to limit your risks:

1. Proper administration

Ensure your administration is orderly and up to date. This is not only a legal duty but also your best defence in the event of bankruptcy.

2. Timely annual accounts

Publish the annual accounts on time. Late publication gives rise to the presumption of improper management.

3. Document decisions

Record important board decisions in minutes. Describe the considerations that were made. This helps in defending against claims.

4. Report inability to pay

Report any inability to pay to the Tax and Customs Administration and the pension fund in a timely manner.

5. Avoid selective payments

Pay creditors pro rata and do not make exceptions for related parties or yourself.

6. Seek advice

Consult an accountant and a lawyer in a timely manner if you face financial problems. Do not postpone important decisions.

7. Consider D&O insurance

Directors' and officers' (D&O) liability insurance can protect you against claims. The insurance covers legal costs and any damages awarded.

Structure and holding company

A holding company structure can offer extra protection. Your personal assets are then held in the holding company, while the risks lie with the operating company. But be aware:

• If the holding company is a director of the operating company, the holding company can also be held liable
• You, as a natural person, can also be held liable as an indirect director
• In the case of group liability, the holding company can be drawn in

Exculpation: clearing your name

As a director, you can try to exculpate yourself (clear your name) by demonstrating that:

• The improper performance of duties is not attributable to you
• You have not been negligent in taking measures to limit the consequences
• You opposed the contested action

This is difficult with a multi-member board. You cannot hide behind the division of tasks; every director is responsible for the whole.

Practical examples

Some situations in which directors were held liable:

• A director who has the BV make large purchases while knowing that payment is impossible
• A director who fails to remit employees' pension contributions
• A director who, just before bankruptcy, sells the office premises at too low a price to an acquaintance
• A director who fails to publish annual accounts for years
• A director who uses VAT as working capital

Conclusion

A BV offers protection, but that protection is not absolute. As a director, you must be aware of the risks and prepare for them. Good administration, timely publication, well-founded decisions, and seeking timely advice are essential.

Are you concerned about directors' liability or do you want to know how to better protect yourself? Contact us for a meeting without obligation with our corporate law lawyers.