Liability of director versus shareholder: this is how it works!
A director who also holds all the shares of a Dutch company, wears two different hats under corporate law: that of shareholder and that of director. This difference plays a part, among others, in determining the personal liability of that person in cases of negligent acts by the (private) company. Dutch Corporate lawyer Marco Guit discusses a recent ruling which addressed this issue.
Creditor: director/shareholder liable
In these proceedings, the claimant was a creditor who had provided services to a Dutch private company. The company was unable to pay the invoices for these services. A respondent in summons proceedings is entitled to institute counterclaim proceedings. This is called a cross-claim or a counterclaim. The respondent was the sole shareholder and also director of the private company. The creditor had summoned the respondent and held him liable for the outstanding invoices. According to the creditor, the respondent, in his capacity as former director and shareholder, had acted negligently towards the creditor. The creditor saw the following as a negligent act. The respondent had sold all shares in the private company to a third party for the symbolic amount of €1,-. This meant that the creditor was disadvantaged in his possibilities of recovery. The company should have secured new orders or refinancing so creditors could be paid.
Transfer of shares for €1 is not unlawful
The Dutch court does not share this opinion. The respondent argued that the company was in very serious financial trouble, that there was less work and that refinancing was impossible. The transfer of shares (that were actually worthless) did not disadvantage the creditor. The company – of course – remains liable for its debts but there are insufficient grounds for directors’ and officers’ liability.
Shareholder not personally liable for actions of company
In the ruling the court finds that there should be a differentiation between possible liability of the respondent as a shareholder and as a director. A shareholder is not personally liable in the Netherlands for those actions taken in the name of a private company. This is pursuant to article 2:175 of the Civil Code of The Netherlands.
Shareholder acting as actual director?
Although shareholders are not legally liable, they are not completely off the hook. If a shareholder acts as an actual director (actual policymaker), he can be held liable to the same extent as formal directors. It differs in each case whether a shareholder actually acts as director. But generally the shareholder has to be substantially involved in the executive board of the company and the internal decision-making process before liability is assumed.
Director liable for serious culpable acts
Existing Dutch case law has to be the basis for answering the question whether the respondent is liable in his capacity as director. If a creditor is disadvantaged by a company because his claim is and remains unpaid and unrecoverable, apart from the liability of the company there can also be grounds to hold the person who, as director, has enabled or allowed noncompliance of the company with its legal or contractual obligations. This requires that the actions towards the creditor were negligent to such an extent that this director can seriously be held culpable for this.
Higher demands for liability of director than liability of private company
The court emphasizes that to assume liability of a director, apart from the company, the demands are higher than general. A high threshold for liability of a director towards a third party is justified by the fact that primarily the actions towards the counterparty are conducted by the company and the public interest that it should be prevented that directors determine how to act based to an undesirable degree