Special directors' liability in the event of bankruptcy

Special directors' liability in the event of bankruptcy

The special directors' liability does not apply to directors of small companies in bankruptcy. But who has to prove that it concerns a small company? The creditors/trustees? Or the directors/managers? At the end of 2021, the Court of Cassation made the decision.

Directors' liability

In the event of a deficit bankruptcy, the creditors obviously have every interest in involving as many debtors as possible in addition to the company in their claims. Not infrequently it is then examined whether the private assets of the directors can be addressed. In practice there are two options for achieving this. Standard directors' liability is already the first option: if the creditors (or the trustee acting on behalf of the creditors) can demonstrate that an infringement has been committed on the Companies and Associations Code (CAC) or on the company's articles of association, they can hold the director concerned liable on that basis.

But this claim has some drawbacks:

If the company has granted discharge to the directors, that road is closed.

The liability is personal: that is to say that the creditors must demonstrate for each individual director that there has been a violation of the CAC or of the articles of association.

Finally, the damage and the connection between the fault and the damage must also be proven.

Special directors' liability

We do not find a second possibility in the CAC, but in the Code of Economic Law (WER). Article XX.225 of the WER provides that in the event of a deficit bankruptcy, the current or former directors, business managers, executive directors, members of the board of directors or the supervisory board, as well as all other persons who have actual management authority over the company, can be declared personally and jointly and severally liable for all or part of the debts of the company in the amount of the shortfall, if it is established that an apparent gross error committed by them contributed to the bankruptcy.

We can deduce several elements from the legal text.

First, the liability claim can affect many people. Not only the persons who formally acted as directors in the company, but also the actual directors. That is always a point of discussion.

Second, the liability claim is only possible if there are:
a) a deficit bankruptcy, and
b) the persons concerned committed a manifest gross error which contributed to the bankruptcy.

The fact that a bankruptcy is deficit is often not a point of discussion. But whether there is an apparent gross error, usually is.

Case law and legal doctrine speak of an obvious gross error if an act was taken that a normally careful and circumspect director would never do. The court may however not rule on the opportunity of the decisions. It is simply a matter of establishing that the director has committed an error that is not in line with what one would expect in corporate life or even in society, and the person concerned knew or could have known that this would cause damage.

The exception

Once all the foregoing elements have been established, there is a possibility of compensation. But there is an exception to that. This is because the special liability does not apply if the bankrupt company has an average turnover of less than 620.000, excluding VAT, in three financial years before the bankruptcy, or – if the company has been incorporated for less than three years – in all financial years before the bankruptcy and the total balance sheet at the end of the last financial year did not exceed EUR 370,000.

The question that was answered by the Court of Cassation on 2 December 2021 is who must demonstrate that the exception applies: the director or the curator. The court of appeal does not use too many words for this: according to the court it follows from the coherence of the legal provisions that the director must prove that the thresholds have not been exceeded so that the special directors' liability cannot be applied to him.

This means that the burden of proof lies with the directors and business managers. They must demonstrate that the company in which they were director, manager, etc., remains below the aforementioned limits. If they fail to provide that evidence, the trustee (or creditors) can proceed with the claim to hold the directors liable for an apparent gross negligence.