Directors’ liability for unpaid bills?
Every company has to deal with nonpaying clients. Starting collecting debt procedures might offer recovery. But what if the debtor goes into administration? Can a creditor hold the director personally liable if he knew in advance that the bills bankrupt company was never going to be able to pay the bill? Dutch lawyer Thomas van Vugt, specialized in directors’ liability, discusses a recent court case on this matter.
Directors’ liability in bankruptcy
In litigation that led to a recent court case the plaintiff had sued the director of a bankrupt company. The company had failed to pay the plaintiff for provided services and the plaintiff holds the director liable for damage now the company has gone into administration and does not provide any recovery anymore. The plaintiff claims that the director, who acted on behalf of the company, never had the intention to pay the invoices of the plaintiff.
Burden of proof on plaintiff
The judge decides in this case that the plaintiff has not shown sufficient evidence that the director knew that the company would fail to pay nor that the director was aware of deliberate nonpaying. The claim is rejected. The plaintiff has no other choice than to present his claim to the trustee who deals with the bankruptcy of the company.
Serious blame to the director
A director of a company that fails to perform its contractual obligations is only under rare circumstances liable due to wrongful act. For liability it must be possible to attribute serious blame to the director. According to settled case law a director can be held liable if he agreed that the company he manages enters into an agreement with a third party knowing that the company will not be able to perform nor provide sufficient opportunity for recovery.
Dutch law firm on directors liability
When dealing with a bankrupt client it can be worthwhile to see if the director can be held responsible for some of the damages or unpaid bills. To hold a director personally responsible for failed payments of a company, however, proves to be difficult. There must be serious blame. Simply doing bad business or naively misjudging profit forecasts resulting in failure to pay or bankruptcy, are not enough. If you suspect that a director deliberately diverts money from the company to avoid paying off creditors, it is important to compile a file. After all, the burden of proof in these cases lies on the creditor. The lawyers of Dutch law firm AMS have a great deal of experience in litigation and collecting debts.