In The Netherlands the debts of a company, usually a private limited company (BV), but also a public limited company (NV), a cooperative society, an association or a foundation, are only to the account of the company (the legal entity) itself and not to the account of the managing director or the board of management, also called the executive board. This is the main reason why many Dutch businesspeople chose the BV format.
But if the managing director or the board of management incur debts that they know cannot be paid, or take so much money from the BV that debtors can no longer be paid, the managing director himself can be (personally) held liable for those debts. The AMS attorneys have a great deal of experience in advising and litigating on (impending) liability of managing directors, called in brief: directors’ liability.
If the board of management does not comply with the rules (and, for example, acts contrary to the Articles of Association), or in general does not carry out its duties properly, it also risks liability versus the BV itself. For example, if the board of management enters into a major contract, while the articles of association require that prior consent of the shareholders have to be obtained, the contract is (usually) valid, but the board of management is nevertheless liable for the consequences thereof.
If a company goes bankrupt, the receiver shall always investigate if there is any directors’ liability. He can summon the board to pay all of the company’s debts, if this is a matter of ‘manifestly improper management’ (mismanagement) and it seems plausible that this mismanagement caused the bankruptcy.
Under the law, the receiver has a head-start if the board of management completely messed up the administration or failed to deposit the annual accounts in time: in those cases, mismanagement is obvious, and the managing director has to show that this did not cause the bankruptcy. It is therefore fairly common practice that managing directors are held accountable by trustees if they failed to comply with their administration or publication duties. This even sometimes occurs when it is not plausible at all that this caused the bankruptcy. It is therefore essential that the board of management makes sure that the annual accounts are in order and deposited in time, and that a proper administration has been conducted. The AMS attorneys – as attorneys for managing directors, but also acting as trustees – have a great deal of experience in this field. Their practical experience as trustees is extremely valuable in assessing litigation risks.
The Dutch civil act states that the managing director of a legal entity is obliged to keep an administration of ‘the financial condition of the legal entity’. This is called the duty of administration. The board of management has to be aware of the rights and obligations of a BV. Therefore, the assessment of whether or not the duty of administration has been fulfilled is always subjective: the law does not state how to conduct an administration. In practice, we advise to keep all contracts and invoices in an accessible manner, and to ensure that all payments are processed quickly in a bookkeeping system.
The Dutch civil act also states that (the board of management of) a legal entity has to publish the annual accounts no later than thirteen months after expiry of the financial year. Annually, a BV has to draw up the annual accounts – in principle no later than five months after expiry of the financial year. These annual accounts of course have to give an accurate picture of the company’s financial condition. Small and medium-sized businesses mostly only have to publish an abridged balance sheet and profit and loss account.
Law firm AMS is based in Amsterdam, The Netherlands. Our corporate lawyers have gained a broad experience in advising and litigating for (international) companies and individuals. The attorneys are highly involved with their client’s interests and offer a sharp and transparent fee structure. Should you require more information on directors’ liability in The Netherlands, or should you have any question with respect to litigation in The Netherlands, please feel free to contact our law firm.