These are stories that the media loves to pick up: directors who have stepped out of line, putting their companies into trouble. The dirty laundry is aired, and soap-like stories circulate. In this edition of Good Morning Legal People, we address the topic of director’s liability. What is the framework, how is it experienced/applied in practice, and what role does potential reputational risk play? We discussed these questions with Barbara Renssen, Head of Contract Management & Legal at VolkerWessels Construction and Real Estate Development, and Martijn van Maanen, lawyer-partner and head of Corporate Litigation at BarentsKrans.

Background

Director’s liability originated in the 1980s when anti-abuse legislation was introduced. Abuse in this context is seen as using a company for illegitimate purposes to deliberately obtain personal benefit at the expense of creditors. Initially, the goal was to protect creditors. It was common for directors of a BV to disappear with large debts left behind, with the creditor as the primary victim. This eventually evolved into the current normative framework for all directors of all legal entities in the Netherlands. It is a framework that is still developing. This is necessary but also brings uncertainty: a director can be liable for certain behavior based on a standard that was only defined in jurisprudence afterwards.

Common Situations

Yet relatively few cases come to light. If a director has caused damage to his own company through seriously blameworthy conduct (“internal liability”), it is often not litigated but rather the director is let go under the guise of a new career perspective. If a case goes public, the dirty laundry is aired. Because parties do not want this, such cases rarely come before a court, so there is limited jurisprudence. Most claims in this area are brought by liquidators against directors of bankrupt companies. We also see claims from the company against former directors when, for example, misconduct is revealed after an acquisition.

A unique category in the Netherlands involves bankruptcy situations where the liquidator can hold directors liable for the shortfall in the estate instead of the damage they caused. The liquidator must then demonstrate that there was clearly improper management and make it plausible that this was a significant cause of the bankruptcy. If the board has not met the publication or administration obligation, it is assumed that there has been improper management. The board can still dispute that the improper management was a significant cause of the bankruptcy.

The standard test for clearly improper management is whether directors ‘have acted as no reasonably thinking director would have done under the same circumstances’. This standard recognizes that reasonable-thinking directors can have differing opinions and can be mistaken, without this constituting clearly improper management.

Practice

Barbara Renssen recognizes practical situations that pose risks in terms of director’s liability. For instance, the four-eyes principle can degenerate into a kind of task division where one signs if the other has done so. It leads to a reverse risk perception. The thought is that if something ultimately goes wrong, the four eyes are jointly responsible and can fall back on insurance. Directors may also think that liability on paper is different from reality. Own authorities are interpreted too broadly, the link between responsibility and liability is inadequately made, or the company is seen as a safety net.

Yet a director does not have to do incredibly crazy things to already be in a risky area. A lot of directors who are held liable are not bad figures. They are people who at one point acted carelessly in making, documenting, or justifying their decisions.

Reputation Management

One of the keys to creating awareness in this area lies in the risk of reputational damage. There are numerous examples of cases that land in the media and are unilaterally highlighted. Once a headline appears in a newspaper or online, the damage is actually already done. If the story is then broadly publicized, ultimately the reputation of the entire company is at stake.

Reputation is also an important aspect in a threatening procedure. Thus, liquidators know that directors might settle because of reputational risks, even in cases where they may not be liable. As long as a procedure is ongoing, directors suffer negative consequences.

Societal Developments

External actors can also play a role in the liability of companies and their directors. For instance, there are climate cases in which NGOs or environmental organizations initiate a lawsuit with the goal of holding a company responsible for caused damage. Even when such cases do not result in favorable judgments, these organizations can achieve important strategic goals: the effect of the process on opinion formation and policy is often stronger than the ultimate outcome of the procedure.

In Conclusion

All in all, director’s liability is regulated by a normative framework that directors and commissioners have to take into account. A framework that is also influenced by (societal) developments. At the same time, the Supreme Court has tried to remove the sharp edges in recent years, giving directors more protection against liability risks than 20 years ago.

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