What about evading directors’ and officers’ liability on grounds for exculpation in the Netherlands?

In the Netherlands, the directors of a legal entity who do not perform their management duties properly may be held personally liable for the damage resulting from such mismanagement. However, in the Netherlands, the directors on a multimember board can also ‘exculpate’ themselves. Corporate Law Lawyer Martijn Kesler explains this possibility by reference to a recent decision of the Dutch court of Rotterdam.

Considerable amounts of money transferred to a foundation

After it suddenly became apparent that a Dutch association could no longer meet its payment obligations, an investigation revealed that large amounts of money (in total €200,000) had been transferred to the bank account of an affiliated foundation. These transfers had taken place without good reasons and caused acute liquidity problems for the association.

The association started proceedings against the directors

The association then held (i) the foundation and (ii) its board of directors liable for the sudden deficit and damage suffered. In these proceedings, the association’s lawyer demanded the Dutch court to rule that the foundation and its board had acted unlawfully by withdrawing money without any basis.

No blame on the director?

However, one of the directors (the ‘Secretary’) claimed that she could not be blamed because as a director she was only responsible for the organisation of activities. According to this director, these activities did not include administrative tasks such as keeping accounts. Moreover, she did not hold all bank cards.

When can directors exculpate themselves in the Netherlands?

However, the Dutch court did not agree with the argument. Indeed, directors can only exculpate themselves by demonstrating that, partly in view of the tasks assigned to the other members of the board, they cannot be blamed and have not been negligent in taking measures to avert the consequences of the deficits.

A director should be involved

As it had been established in the proceedings that (a) the transfers were not in the interest of the association and (b) it could be deduced from the statements that the director in question knew or should have known that these amounts of money had been withdrawn, but that (c) she had not taken any action, the court considered that she was not entitled to any possibility of exculpation.

What are the duties of a director in the Netherlands?

After all, by neglecting to carry out an investigation, she did not adequately fulfil her management duties as a director. A director should assess the risks of payments in advance and take measures in the event of suspicions that something is wrong. At that point, a director must become involved and take measures against mismanagement and thus personal liability. Neglecting the interests of the legal entity may be part of this.

Corporate Law Lawyer in matters of directors’ and officers’ liability in the Netherlands

In the event of irregularities, it is advisable for the board of directors to be proactive. This can be done by (temporarily) suspending the director in question or by carrying out an internal investigation into the conduct. In any case, it is essential that directors act quickly if they want to avoid being held liable as well.

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