Director personally liable for debt to creditor?
Creditor X was ordered by the Dutch court to pay more than € 45,000 to a private limited company. Creditor X complied with this judgement. This judgement was overturned on appeal. As a result of this the limited company had to repay this sum to the creditor on the grounds of undue payment. However, at that time the limited company had insufficient funds to be able to comply with the payment obligation. The private limited company also went bankrupt soon thereafter. Can the creditor hold the director personally liable for repayment? Dutch corporate lawyer Thomas van Vugt explains on the basis of a recent case.
Legal action on the grounds of director’s liability
Following the bankruptcy, the creditor started a legal action against the directors on the grounds of director’s liability. According to the creditor, the directors had acted unlawfully by (i) failing to submit the annual accounts (on time) and (ii) removing all funds from the limited company. However, the court rejected the creditor’s claim.
Failing to submit annual accounts is improper management
The creditor appealed. The appeal court first considered the allegation that the directors failed to submit one or more annual accounts. This means that there was apparently improper management. A trustee in bankruptcy can then hold the directors of a bankrupt company liable for paying all the limited company’s debts. It is then up to the directors to show that the mismanagement was not the cause of the bankruptcy.
Personal liability in the event of improper management
However, this liability on the part of the director with respect to the trustee in bankruptcy does not – according to the appeal court – automatically mean that the directors have also acted unlawfully with respect to individual creditors in the sense of Civil Code section 6:162. Special circumstances are required for this (and these have not been put forward in this case).
Personal culpability required for director`s liability
As regards the allegation that the directors have removed all funds from the limited company so that the creditor’s recovery has been frustrated, the appeal court stated the following first and foremost. A director can act unlawfully with respect to a creditor of the corporate entity if the director collaborates with an act or omission by the corporate entity which results in or allows the corporate entity to fail to comply with its legal or contractual obligations. However, liability also requires that the director is seriously culpable in his actions.
No conscious harm to the creditor by the directors
The appeal court believed that that did not apply in this case. In offsetting a long-term debt to the shareholder in 2007 – as a result of which the limited company`s assets were reduced – the directors did not have to take account of the fact that the judgement in which the creditor was ordered to make payment would be set aside in 2009. It was not found that the directors knew or should have known that this offsetting would no longer make the creditor`s recovery possible a few years later. The appeal court ratified the court’s judgement.
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