At what points can a director be held personally liable for a company’s debts? In principle, the legal personality of a company precludes this. However, this does not mean that a director can act without limits to their actions. In certain cases, a director can indeed be held personally liable, such as in cases of misfeasance. Using a recent judgment by the Court of Appeal of Den Bosch as an example, corporate lawyer Dirk de Waard explains directors’ liability.
What are examples of misfeasance?
A misfeasance occurs when a director deliberately engineers or allows the company to default on its obligations to third parties, for example:
- if a director enters into a purchase contract with a supplier on behalf of the company, when the director knows or reasonably ought to have known that the company will be unable to perform its obligations under that contract and will have no means of providing a remedy for the breach; or
- if a director leaves only one creditor unpaid, while all other creditors are paid, and in such a case there was an unwillingness to pay.
Selective payments may be grounds for directors’ liability
Only where the director can be personally sufficiently seriously at fault for this can it lead to their personal liability for the creditor’s loss. This is a crucial threshold.
Despite the fact that, in principle, directors are free to make their own assessment and decide which creditors are satisfied, selective payment in case of misfeasance can lead to directors’ liability. The Den Bosch Court of Appeal endorsed this in a recent ruling. The court therefore considers that in cases like this, the director in question was sufficiently seriously personally at fault.
The facts were these:
A sole creditor remains unpaid, making bankruptcy impossible
In the proceedings before the Court of Appeal of Den Bosch, there was just one creditor left unpaid, while all other creditors had been paid by the director of the company. The possibility of filing for bankruptcy of the company had thus been taken away from the creditor.
The director deliberately went into liquidation to limit the opportunities to recover the debt
In addition, the director had liquidated the company’s assets at too low prices. Therefore, the ‘shell’ company failed to provide recourse for the claim of the remaining creditor, who was thus left empty-handed.
The court ruled that there had been an unlawful act for which the director was held personally liable.
If you have any questions about directors’ liability arising from misfeasance, please get in touch
Misfeasance has several manifestations, including selective payments to creditors. Determining whether such a form of misfeasance results in directors’ liability depends heavily on the circumstances of the case. In practice there is a very high threshold required to establish directors’ internal liability. For this, serious culpability must be established. Nevertheless, directors should be aware of the ever-evolving possibilities of being held personally liable.
VIOTTA Advocaten is an experienced firm with lawyers with many years of experience in litigation practice. They handle both domestic and international proceedings. Thanks to such experience, VIOTTA Lawyers can assess the chances at the outset better than anyone else, thus avoiding unnecessary costs.
If you have questions as a director or creditor regarding misfeasance, and/or directors’ liability, please feel free to contact VIOTTA litigation and corporate lawyer Dirk de Waard, who will be happy to advise you.