As a director, you have more responsibilities and you are therefore exposed to more risk. You can be held civilly liable in the event of an error in carrying out your mandate, a situation which sometimes entails heavy financial consequences. When can you be held liable? Can the general meeting grant a discharge? Are you still liable after you resign? Can you take out insurance for this risk?
The rule is as follows: the director is not personally bound by the commitments they make in the name of and on behalf of the company.
In principle, your personal assets cannot be used to pay off the debts of your company. However, note that there are exceptions to the rule!
The company can hold the director liable for management errors. In this case, they must be errors which a normally prudent director would not have committed under the same circumstances.
The following are examples of management errors:
- excessive advertising expenses;
- signing a contract knowing that the conditions are unfavourable to the company;
- insufficient monitoring of the services provided by the company's accountant;
- failure to pursue a solvent debtor in a timely fashion.
The company must prove the error, the prejudice and the causal link between the two.
The general meeting will decide whether or not to pursue the director by a simple majority. A director who holds the majority of the shares is not necessarily untouchable in all cases. If one or more shareholders believes that they are responsible for errors committed against the company, they can initiate a minority suit.
Third parties can also hold the director liable. When a serious proven and blatant error has contributed to the bankruptcy of the company, the trustee or the creditors with unpaid invoices can take legal action against the director.
Directors who do not comply with the Code or the articles of association are committing an error. In order to be compensated, the prejudiced party must demonstrate the cause and effect link between the error and the prejudice.
LIMIT YOUR RISK
THE NEW COMPANY AND NON-PROFITS CODE
The amount of a director’s liability is limited to a maximum amount based on the size of the legal entity, which is determined based on its revenue and the total balance sheet of the previous financial year. The amounts range from €125,000 and €12,000,000.
The limit is also applicable to their liability vis-a-vis the company and third parties, and both to contractual and extra-contractual liability, regardless of the legal grounds (therefore, also for liability in the event of bankruptcy which is now regulated in the Code of Economic Law) and by events or series of events, regardless of the number of plaintiffs or shares.
Liability is limited in the event of an habitual minor error, a serious error, fraud and when social contributions, the VAT or the withholding tax isn’t paid. Exemption and guarantee clauses via which the company releases its directors of liability in advance are forbidden, as are any limitations of liability exceeding the law.
The general meeting decides whether or not to discharge the director every year. In other words, the shareholders notify the director if they have - or have not - correctly executed their mandate.
It often mistakenly thought that the discharge releases the director of all subsequent liability. In fact, it only includes the civil liability of the director with respect to the company and not their liability vis-à-vis third parties, including the authorities.
In addition, the director cannot invoke the discharge if they have knowingly hidden information (erroneous publication of the annual financial statements or omissions in them). Ensure that the accounting is done correctly or appoint someone to do so for you.
If there are things going on that you can’t approve as a director, record them in the minutes of the next general meeting. If nothing results from your comments, report the facts to the next general meeting. Ask the other shareholders to correct the situation. As a last recourse, and if the facts are serious, resign. Directors are always liable for the errors made before their departure, even if they only cause problems after they are gone.
Civil liability insurance for directors is increasingly popular. In principle, the company can take out this type of insurance for its director. In this case, the policy must be reviewed carefully to understand which types of errors are covered by the insurance. However, there is no coverage available for cases of fraud or criminal liability.