Directors’ liability in bankruptcy is an important topic for entrepreneurs, creditors, and investors. When a company goes bankrupt, the question often arises whether the bankruptcy is solely the result of disappointing circumstances, or whether directors have made mistakes for which they can be held personally liable. In this article you will read when directors’ liability in bankruptcy may apply and what legal options exist.
What is directors’ liability in bankruptcy?
Directors’ liability in bankruptcy occurs when a director is held personally liable for the debts of the bankrupt company. In principle, a BV (private limited company) or NV (public limited company) is liable itself, but under certain circumstances this protection can be breached.
This happens particularly when the board has performed its duties improperly.
The role of the bankruptcy trustee (curator)
After bankruptcy, the bankruptcy trustee (curator) investigates the causes of the bankruptcy. This involves looking at the actions of directors in the period preceding the bankruptcy. If there is improper management, the bankruptcy trustee can proceed to file a claim for directors’ liability in bankruptcy.
Improper management explained
Improper management means that a director has manifestly performed his duties improperly and that this was an important cause of the bankruptcy. Examples include:
- structurally failing to keep proper administration;
- failing to publish annual accounts on time;
- entering into irresponsible obligations;
- selective payments to affiliated parties;
- ignoring obvious financial problems.
Administration and publication obligation
The administration and publication obligation play a major role in directors’ liability in bankruptcy. If these obligations have been violated, improper management is presumed.
This means that the burden of proof shifts significantly to the director.
External directors’ liability
In addition to liability towards the estate, a director can also be liable towards individual creditors. This can be the case when a director knew or should have understood that creditors would no longer be paid.
Fraudulent preference (Actio Pauliana) and directors’ liability
In bankruptcy, it regularly happens that directors withdraw assets or favor certain creditors just before bankruptcy. This is called fraudulent preference (paulianeus handelen).
Such actions can contribute to directors’ liability in bankruptcy, especially when creditors are prejudiced as a result.
When is a director not liable?
Not every bankruptcy leads to personal liability. In practice, we see that directors’ liability in bankruptcy is not applicable when:
- the bankruptcy has mainly external causes;
- the board took timely measures;
- administration and publication were in order;
- there is no prejudice to creditors.
International aspects
Directors’ liability in bankruptcy can also play a role in international companies, for example when foreign directors are involved in a Dutch company.
General information about bankruptcy and directors’ responsibility can be found via Rechtspraak (Dutch Judiciary).
What can creditors do?
Creditors who suspect that improper management is involved do well to have this investigated in a timely manner. In some cases, this can lead to extra recourse options outside the bankruptcy.
What can Arslan Advocaten do for you?
Arslan Advocaten advises directors, shareholders, and creditors on issues surrounding directors’ liability in bankruptcy. We assess risks, guide proceedings, and advise on strategic next steps.
Read also more about our expertise within corporate law, our experience with bankruptcy of a contracting party and international trade disputes.
Costs and litigation financing in bankruptcy disputes
In cases concerning directors’ liability, we generally do not work on the basis of free legal assistance. These proceedings require careful legal assessment.
In certain cases, it can be examined whether litigation financing is possible. We work together with an independent litigation financier who – after assessment – may be willing to (partially) finance the attorney’s fees.
About the author
This article was written by Onur Arslan, attorney and founder of Arslan Advocaten. He specializes in corporate disputes, including bankruptcy, directors’ liability, and insolvency issues.
Would you like to discuss whether directors’ liability applies in your situation?
👉 View Onur Arslan’s profile and contact him directly.
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Frequently Asked Questions
When can a director be held personally liable in bankruptcy?
A director can be held personally liable if he has committed improper management, such as failing to publish annual accounts on time or entering into irresponsible obligations. This can be the cause of the bankruptcy and leads to liability.
What is meant by improper management in the context of bankruptcy?
Improper management means that a director has manifestly performed his duties improperly, for example by not keeping proper administration or ignoring financial problems, which can be the cause of the bankruptcy.
How do administration and publication obligations affect the liability of directors?
Violation of administration and publication obligations is presumed to be improper management, shifting the burden of proof to the director, and he can be held personally liable for debts of the bankrupt company.
When is a director not liable in bankruptcy?
A director is not liable if it can be proven that he did not act improperly and that the bankruptcy is the result of external circumstances or disappointing market conditions.
