Directors' liability in bankruptcy

In Belgian corporate law, the general rule is that the directors of a company are not personally liable for the debts of the company. This means that creditors of a bankrupt company first look to the assets of the company itself to satisfy their claims.

However, there are exceptions to this rule.

Directors of legal entities can be held liable under common law, under corporate law, or under insolvency law.

The liability of directors can be civil or criminal in nature. In the case of civil liability, the creditors of the company can bring a claim against the directors to recover the damage suffered. In the case of criminal liability, the director can even be criminally prosecuted for fraudulent insolvency or misuse of company assets.

On a civil level, there are basically two types of liability:

The first type can only be invoked in the event of bankruptcy, such as liability of the founders due to manifestly inadequate capital and liability for manifestly gross errors that have contributed to the bankruptcy.

The second type of liability can arise even outside a bankruptcy scenario. This can refer to liability under Article 1382 of the Belgian Civil Code (non-contractual liability), liability for ordinary management errors (contractual liability), for violation of the law or statutes, failure to apply the alarm bell procedure, etc.

In certain cases, directors can be held personally liable for the debts of the company:

1) Manifestly gross error that has contributed to the bankruptcy (Article XX.224 WER);

This is the case when the directors have not properly fulfilled their duties, for example by not complying with their obligations regarding accounting, annual accounts, and reporting.

This may also be the case when the directors have made unlawful payments to shareholders, or when they have taken unreasonable risks with the company’s assets.

There must be a manifestly gross error or negligence on the part of the director that has contributed to the bankruptcy.

The manifestly gross error is seen as a manifest error that any normal, prudent, and reasonable director placed in the same circumstances would not have committed. In other words, a simple judgment error that any normal director would have made is not a manifestly gross error.

The error must have contributed to the bankruptcy. This means that the manifestly gross error does not necessarily have to be the main cause of the bankruptcy.

The gross error points to an exceptional character of the error:

For example, continuation of loss-making activity resulting in a late filing of the books,
systematic non-payment of public debts,
reckless financial policy,
blatant disregard for the corporate interest,
fraudulent systems, and phoenixing, favoring of the director.

This liability applies to (former) directors of all enterprises, except for natural persons who carry out a self-employed professional activity. However, there is an exception for small enterprises (companies and non-profit organizations) (average turnover < EUR 620,000 (excluding VAT) in the three years prior to bankruptcy, balance sheet total last financial year < EUR 370,000).

The right to claim belongs to the trustee, and if the trustee fails to act, the creditor. The trustee/third party must demonstrate a limited causal link.

It is important to emphasize that the liability of directors is not automatically established. It must be demonstrated that there are obvious and serious errors in the management of the company, such as pursuing a reckless policy, not keeping proper books or failing to comply with legal obligations.

If director’s liability is established, the directors can be held personally liable for the debts of the company. This can lead to financial consequences for the directors, such as the loss of their personal assets or having to pay damages.

Therefore, it is important for directors to take their duties as directors seriously and to understand their responsibilities well. In addition, directors can protect themselves against liability by intervening in financial problems in a timely manner and taking the right steps to get the company back on track. It is advisable to seek legal advice to limit potential risks.

2) Wrongful trading breaches (article XX.227 WER);

Directors can also be held liable if they did not intervene when they knew or should have known that the company was in financial trouble. If the directors had intervened in time and taken appropriate measures to improve the financial situation of the company, bankruptcy could possibly have been avoided.

This translates into a new provision that prevents the director’s liability for continuing the activities of a company while there was no reasonable prospect of avoiding bankruptcy.

In other words, he knew or should have known that the company was hopeless. This is also called wrongful trading.

The board will have to carefully examine which circumstances indicate that the company is moving from ‘continuity’ to ‘discontinuity’. Only when it is clear that there is no reasonable chance of survival does the director’s liability come into play.

The question is when the tipping point falls: from when did or should the director have known that there was apparently no reasonable prospect of maintaining the company or activities and avoiding bankruptcy? From when did the director not act as a normal prudent and careful director would have acted in the same circumstances?

In a very interesting and extensively motivated judgment, the following was written about this (Kh. Gent, department Dendermonde, December 22, 2014):

“An entrepreneur cannot be blamed for using the last chances that he reasonably still sees. On the contrary, in difficult economic times, it is his duty to seize those opportunities, both with regard to the company and to society.

Post factum claiming that the company has no chance of survival is therefore all too easy. The downfall of a company can usually be predicted some time in advance, sometimes months in advance. Such predictions, however, are based on the fact that the company will disappear under unchanged circumstances.

It is precisely the notion of ‘unchanged circumstances’ that plays a crucial role in the predictability of the company’s demise. Here too lies a task or an opportunity for management, which can intervene in what it has control over to reverse the slide towards discontinuity.

Changing circumstances and opportunities are inherent in economic life.”

In any case, directors will have to be very attentive when evaluating the company’s financial and accounting documents. Because not complying with company rules, think of the alarm bell procedure, can be an important indicator in assessing whether a director unreasonably continued a hopeless company.

All this is very factual and subject to subjective appreciation by the judge. Thus, the court of appeal in Antwerp ruled in a case involving a company that had been active for more than a century and played an important economic and social role, that disappointing results and a deteriorating liquidity position due to temporary factors alone were insufficient to claim that the directors should have known that the company was hopeless (Antwerp, March 8, 1994).

This new provision entails an extensive liability rule for directors and they are therefore better off being cautious. Indeed, within the framework of this provision, a slight error is sufficient and no causal link needs to be demonstrated with the net passive.

A number of implicit wrongful trading rules must therefore

A number of implicit wrongful trading rules must always be taken into account, such as:

the alert procedure
positive duty of ongoing financial monitoring
liquidity test for payouts (limitation of payout options)
founder liability

The right to claim damages belongs to the receiver. The receiver does not have to demonstrate a causal relationship; once the fault is assumed, the damage (part or all of the net liability) is established, and the causal relationship is also established by law.

3) The specific liability rules for non-payment of certain tax and social debts (Article 442quater ITC (withholding tax) and Article 93undecies VAT Law (VAT), both replaced by Article 51 Fiscal Collection Code and Article XX.226 Code of Economic Law);

Directors can be held jointly and severally liable for all or part of the social contributions and tax debts (withholding tax and VAT) due at the time of the bankruptcy ruling, with respect to the RSZ and the tax authorities.

Objective liability for RSZ debts if the director has been involved in at least 2 bankruptcies or liquidations where RSZ debts have remained unpaid in the 5 years before the bankruptcy, and was also a director at the time of the bankruptcy.

Presumption of fault for non-payment of withholding tax and VAT if at least 3 overdue debts have not been paid within 1 year (monthly payer) at least 2 overdue debts have not been paid within 1 year (quarterly payer) The presumption is rebuttable: the director can provide evidence to the contrary.

The presumption does not apply if non-payment is the result of financial difficulties that led to judicial reorganization, bankruptcy, or judicial dissolution.

4) Late filing for bankruptcy (Article XX.102 CEL);

The late filing of cessation of payments is attributable to the directors when they knew, or should have known that the bankruptcy conditions were met and the reporting obligation was not suspended.

When fault, damage, and causality between the two are demonstrated, the person who failed to timely declare the state of bankruptcy may be civilly liable for the increase in the net liabilities between the date one month after the date deemed to be the date of cessation of payments and the date of bankruptcy. There is no automatic liability. The larger the company or the more complex the situation, the more it may be presumed that the director was not aware of the bankruptcy.

The failure to file for bankruptcy within a month is also criminally sanctioned by Article 489bis 4° Criminal Code when the debtor intends to postpone the bankruptcy. There must be a specific intention to postpone the bankruptcy.

5) The alarm bell procedure (Article 633 Companies and Associations Code, Article 332 Companies and Associations Code, and Article 431 Companies and Associations Code, or Article 7:228 Code of Companies and Associations, Article 5:153 Code of Companies and Associations, and Article 6:119 Code of Companies and Associations);

The aforementioned provisions impose on the directors of a BV, CV, and NV the obligation to convene the general meeting according to a specific procedure to decide on the dissolution of the company when:

(i) The net assets are negative or are likely to become negative (in BV and CV) or when, as a result of losses incurred, the net assets have decreased to less than half of the share capital (NV).

(ii) the board determines that it is no longer certain that the company (in BV and CV), according to reasonably expected developments, will be able to pay its debts for at least 12 months as they become due.

6) Founder’s liability (article 456 of the Belgian Company Code, article 229(1) of the Belgian Company Code, and article 405 of the Belgian Company Code, equivalent to article 7:18(2) of the Belgian Code of Companies and Associations, article 5:16(2) of the Belgian Code of Companies and Associations, and article 6:17(2) of the Belgian Code of Companies and Associations);

If the capital or starting assets are apparently insufficient, the founders are jointly and severally liable for the company’s obligations when the bankruptcy is declared within three years of its incorporation. The condition is that the capital or starting assets were apparently insufficient for the normal exercise of the intended activities for at least two years. A causal link between undercapitalization and bankruptcy is not required.

The judge must place himself at the time of incorporation and must determine what the founders knew or should have known at that time.

7) Ordinary management error (article 527 of the Belgian Company Code and article 262-263 of the Belgian Company Code, article 2:56 of the Belgian Code of Companies and Associations);

The directors are in a contractual relationship with the company, and their liability will usually be contractual. This concerns the so-called actio mandati, which can be brought by the general meeting and, in the event of bankruptcy, by the liquidator.

Think of management errors such as failure to pay tax and social debts, insufficient supervision, reckless spending, leaving management to a third party who is then deemed to be a de facto director, etc….

8) Violations of the articles of association and/or the Belgian Company Code / Belgian Code of Companies and Associations (article 528 of the Belgian Company Code, article 263 of the Belgian Company Code, now included in article 2:56 of the Belgian Code of Companies and Associations);

Management errors based on contractual liability can also relate to breaches of the law and the articles of association (e.g., regarding rules applicable to conflicts of interest, carrying out an unlawful revaluation, etc.).

It should also be noted that there is a presumption of liability for failure to file the annual accounts under article 3:10 of the Belgian Code of Companies and Associations. The damage suffered by third parties is therefore deemed to result from the failure to file the annual accounts. Third parties who wish to enter into a contractual relationship with a company must be able to have knowledge of its solvency and therefore of its recent accounting data.

9) Breaches of the general duty of care (Article 1382 of the former Civil Code).

Directors who commit a tortious act against third parties are liable for this. The fact that this tortious act may also be attributed to the company does not mean that the directors are exempt from liability.

The tortious act of directors may consist of non-payment of wages, tax and social debts, or the taking on of debts that they knew they could never repay. The tortious act may also consist of payments made to directors, despite the articles providing for the unpaid nature of the directorship.

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Note that a prior judicial reorganization procedure does not grant immunity from liability for directorial errors or for obvious gross negligence. A summons to the screening service, currently KOIM, also does not exempt directors from liability. Nor does the unpaid nature of a directorship provide immunity from obvious gross negligence.

Claims against directors for transactions relating to their duties become time-barred after 5 years from the transaction. This period also applies if the claim is based on a quasi-delictual fault of the directors (Art. 1382-1883 of the former Civil Code).

If the transactions are deliberately concealed, the starting point for the limitation period is from the discovery thereof.

In any case, it is important to note that directorial liability in the event of bankruptcy is a complex legal issue. Each case is different and requires a thorough analysis of the specific circumstances. As experts in this field, we recommend seeking tailored advice from us.