Directors’ liability

When can directors be held personally liable? What can directors do to prevent being held personally liable?

Representation of a legal person

Legal entities, such as BVs (private limited company), NVs (public limited company), associations or foundations, can only be represented by one or more natural persons, the directors or other authorized persons.

Directors conclude contracts on behalf of the legal person. If the company fails to comply with agreements arising from the contracts or causes damage, the company can be addressed, not the directors. However, in certain cases directors can be held personally liable by third parties (externally) or by the company itself (internally). When will this happen?

Internal directors’ liability

When a director does not perform his tasks properly, the company can hold him liable for the damage it was caused. This is referred to as internal directors’ liability.

Directors can be held internally liable of the damage caused because the director:

• Needlessly took high financial risks, or
• Represented the company without proper authorization.

External directors’ liability

In the event of external directors’ liability, directors are held liable for damage caused to third parties, such as suppliers of the company, suffering from directors’ actions.

For instance, a director can be held liable by third parties when damage was caused because the director:

• Bought products on behalf of the company, when he knew they could not be paid.

Serious personal blame

The damage can only be recovered successfully from the director when a serious personal blame can be made towards him. Thus, a minor mistake does not lead to directors’ liability.

Collective directors’ liability

In principle, directors’ liability is collective. Thus, all board members are liable. An individual board member can avoid liability in the following cases:

• He can prove with regard to his agreed specific duties and powers that he was not negligent and thus cannot be blamed. Therefore, it is of importance that a division of tasks is made in writing.
• He has had recorded explicitly that he was against the decision that caused damage to the company or third parties.

Directors’ liability insurance

A directors’ liability insurance (D&O insurance) covers a significant part of the directors’ liability, namely what is caused by serious culpable conduct. However, damage caused intentionally is not covered by the insurance.

What can we do for you?

Our lawyers have been advising both, companies and directors on external and internal directors’ liability for many years. We assist them by organising workshops but also by holding liable directors, and representing directors that are held liable.

Would you like to learn more about or make use of our legal assistance? Please contact: