COVID-19 impact: directors’ duties and liability

COVID-19 has hugely impacted both society and the economy. In the short term, there has already been a profound effect on business operations and business continuity for many companies. The same is true for the management boards/managing directors and their duties. They face a significant challenge to maintain their companies’ business operations and resilience within the current market conditions. However, in the current uncertain conditions, management boards/managing directors should bear in mind their duties and the implications of their actions on the company and its stakeholders (including creditors).

Below, we consider COVID-19’s potential impact on directors’ duties and liability under Dutch law and provide guidelines on how to mitigate the risk of personal liability.

See our Coronavirus (COVID-19) feature for more information generally on the possible legal implications of COVID-19.

Directors’ liability

In principle, the management board is responsible for the determination of all company policies and the conduct of all operations of the company, including the representation of the company. In performing its duties, the management board has to act in the interest of the company and its business, but should also take into account the interests of all the stakeholders. In making its decisions, the management board must weigh available information and all foreseeable developments.

A managing director must perform his/her duty to the manner in which a reasonably competent and reasonably acting managing director would perform that job under the same circumstances. The threshold for liability is high. A managing director is only liable when a serious reproach can be made for the improper performance of his/her duties. 'Improper' should be read to mean 'clearly negligent and insufficient' and therefore not only improper in the moral sense of the word.

Managing directors can be liable:

• towards the company (for improper management (onbehoorlijk bestuur));
• towards third parties (based on tort (onrechtmatige daad));
• for the deficit of the estate following the bankruptcy (faillissement) of the company; and
• towards the tax authority.

Below we consider each of the above mentioned categories (and possible mitigating actions).

Liability towards the company

Managing directors can be liable for improper management, resulting from a breach of duty (or contract) that each of the managing directors has towards the company or in case of improper management (onbehoorlijk bestuur) or illicit distributions of dividends.

To mitigate the risk of personal liability towards the company:

• where debtors and contracting parties of the company experience the same critical conditions, make a thorough assessment of the debtors’ creditworthiness when entering into new obligations;
• under Dutch law, the general meeting of shareholders may resolve to distribute dividends or to make distributions at expense of freely distributable reserves maintained by the company. Such shareholder’s resolution to make a distribution does not have effect prior to the approval of the management board. The management board should withhold its approval if it knows or should reasonably foresee that the company will be unable to pay its due and payable debts after the distribution. Further it should diligently oversee amending eg lowering the company’s capital or other distributions.

Liability towards third parties (based on tort) (onrechtmatige daad))

If the company is identified to have acted in a tortuous or negligent manner, this does not necessarily lead to the conclusion that the managing director has also done so. This is different when the acts of the managing director are recognised as wrongful. The following mitigative measures could be considered:

• refrain from causing the company to enter into obligations knowing that the company will unable to meet such obligations;
• refrain from creating the appearance of creditworthiness towards a third party although the director knows or should have known that contrary is true;
• refrain from omitting to pay the company’s debt, whilst the company has (access to) sufficient cash or credit facilities;
• be cautious with selective payment of creditors (in priority over others) at the time of the bankruptcy of the company or at the time that the director knew that the bankruptcy of the company was foreseeable or probable and rights of other creditors of the company have been harmed (please see here for more information on the (im)possibility of selective payments); and
• ensure adequate compliance with the bookkeeping and publication obligations and make sure the annual accounts, possible interim figures and the annual report are correct and not misleading. Properly and timely file annual accounts with the trade register even if adoption by the general meeting is delayed as a result of the current circumstances (and governmental preventive measures in connection therewith).

Liability for the deficit of the estate following the bankruptcy (faillissement) of the company

In the event of bankruptcy of a company, each of the managing directors shall be liable for the deficit of the estate following the bankruptcy of the company if they have discharged their duties in an obviously improper manner and there is prima facie evidence to show that this has been a major cause of the company's bankruptcy. Such 'obvious mismanagement' (kennelijk onbehoorlijk bestuur) should be read to signify a grave mistake which exceeds the free margin of entrepreneurial risk. This concept is construed relatively broadly as may be indicated by the following examples of obvious mismanagement:

• failure to ascertain the (financial) reliability of a business partner;
• obtaining insufficient expert counsel and instruction in important transactions;
• carrying out irresponsibly expensive investments;
• failure to provide (available) information to the board of supervisory directors;
• taking decisions of far reaching financial consequence without adequate preparation;
• neglecting the supervision of the credit position of the company;
• failure to take timely measures to hedge against clearly foreseeable risks;
• neglecting employment policy and relations with the employees to the extent that labour unrest emerges and strikes break out;
• giving directors who have clearly proven themselves incompetent the freedom to commit the company for unlimited amounts; or
• unjustified personal gain.

Liability towards the tax authority

Managing directors of companies which are subject to corporation tax are personally liable for the remittance of social security contributions (or advances thereon), wage tax, excise duties, VAT and obligatory pension fund contributions if the company has failed to pay these and the failure to pay and the failure to pay is likely to be caused by improper management. To mitigate:

• timely inform the tax authority (correctly) of the company’s inability to fulfil its tax obligations; and
• we note that the tax authorities should also be informed about the inability to fulfil tax obligations if you utilize the possibility of temporary tax relief (as mentioned below).

Specific COVID-19 measures

Under the current circumstances, the company and its managing directors could anticipate on financial distress expected to arise due to the outbreak through several additional examples of specific measures, also mitigating the risk of managing directors being held liable:

• explore the availability of governmental supportive financial measures, as these may provide essential leeway for the company. Such as the availability of governmental guaranteed credit facilities, temporary suspension of tax obligations and measures regarding employment related matters, please see here; and
• explore or take a ‘community-based approach’ with creditors and contracting parties by entering into open discussions and (re)negotiations of contracts. For additional information on the possibility of renegotiating or amending contracts under the current circumstances, please see here.

Finally, in relation to all of the potential measures the management board could take, it is important to properly document (via board minutes, letters, transcripts of (video) calls, financial projections, (external) advice) what the management board has done to mitigate current risks and why the measures the board has taken were expected to be helpful.