Directors' liability in the Companies and Associations Code
Directors of a company should perform their management duties properly and be aware of the liability associated with it. After all, directors of a company are responsible for their company and therefore also for the mistakes committed during the exercise of their managerial duties.
When damages arise from failures attributable to them, directors can be held liable.
Who is liable?
Directors' liability to their company does not only apply to legally or statutorily appointed directors.
The Companies and Associations Code provides that any person who has actual managerial authority (or had) within a company, liable can be held liable for mistakes committed during his or her assignment. In other words, de facto directors are also liable.
In addition, directors' liability is joint and several when the governing body constitutes a college or when the error constitutes a violation of the articles of association or the Companies and Associations Code. This joint and several liability can be broken if directors prove that they had no part in making the board error and reported it to their fellow directors.
What mistakes are directors liable for?
Common governance errors
This category includes the general management errors made during the execution of the management order. Typical are general standards of good policy such as forgetting to take out certain insurance policies or failing to protest an invoice.
Obvious gross errors that contributed to bankruptcy
When a director makes an apparently gross mistake that later gives rise to bankruptcy, the director can be held liable for some or all of the debts. Examples include serious tax fraud or failure to keep accounting records.
Wrongfull trading
With wrongful trading is meant deliberately continuing a loss-making activity, without a recovery plan or measures. Ignoring that your ship is sinking and allowing it to continue sailing may give rise to personal liability of the director. If the company goes bankrupt, the court may order director(s) to pay some or all of the net liabilities.
Breaches of law or statutes
As a director of a company, you can be held liable for breaches of the law or the company's articles of association. Typical examples are failure to file or late filing of annual accounts or acting outside the statutory purpose.
Extra-contractual errors
Directors are also liable for damages resulting from extra-contractual errors committed towards the company or towards third parties.
How to protect yourself from directors' liability?
The most efficient way to protect yourself as a director against directors' liability is to take out a insurance.
Depending on the type of insurance, the directors' private assets are protected, non-contractual damages to third parties as well as the risks of contractual damages arising from the performance of the business activity.
Normal careful foresight person
In principle, directors can only be held liable for acts that exceed the boundaries of 'normal driver behaviour'. To determine this framework, we look at how a normal, prudent and foresighted person placed under the same circumstances would act.
This takes into account all circumstances, including the fact that drivers are sometimes forced to quickly and in uncertain circumstances take decisions.
Collegial governance report mistakes and distance yourself from them. If you are part of a collegiate board, you can be held jointly and severally liable for mistakes made by fellow board members.
So regardless of whether you committed a fault yourself you will be held liable for the errors of governance. To escape liability, it must be proved that you are no share had in making the mistake.
Drivers who notice an error should report it to one of their fellow drivers. Do this in writing, so that there is evidence of the report or that your opinion as a director was different from that of your fellow directors.
The cap on directors' liability
Since the new Companies and Associations Code, the legislator has introduced a limitation of liability for directors introduced. The extent of the liability limit is determined as a function of the company's average balance sheet total and average turnover over the past 3 years (4 categories based on turnover/balance sheet total with a cap of EUR 125,000 to EUR 12m).
However, the legislator has provided for quite a few exceptions, making cap de facto only applies in the case of an accidental slight error. This largely erodes the principle.
Need advice on this matter? Our corporate law experts are here to advise you. Contact us via info@bannister.be or 03 369 28 00
