Should the new director pay for the mistakes of his predecessors?
Should the new director pay for the mistakes
of his predecessors?
August 2021 – You accept a directorship in a company with a successful past. Or so you thought, because soon afterwards you discover skeletons in the closet. Or worse: you are hired as the person who will get the company back on track. Don't you risk having to pay for the mistakes and debts of the past?
Directors' liability is usually personal
In principle, a director will only be liable if he or she has personally committed an error. In other words, the "plaintiff" will have to prove that, during his or her term of office, the director acted contrary to a law or the articles of association, or that the director breached the general duty of care.
If this proof is provided, the director who committed the fault, the offence... will also be effectively liable. But not the other directors.
The administrative body forms a college
However, this last point needs to be qualified somewhat: if the administrative body forms a college (which is the case in an SA/NV, for example), then liability for misconduct is a joint liability. In this case, one director will pay for the faults of the other, even if the first director has only an ancillary role or holds the title only for form's sake.
Worse still: if a member of the administrative body has violated a provision of the Companies and Associations Code (CCA) or if that member has committed an infringement of the articles of association of the legal person, all members are automatically jointly and severally liable both to the company itself and to third parties who have suffered damage.
The temporal aspect
But what if your mandate had not yet started or, conversely, had already ended at the time of the fault or infringement?
One thing is certain: you cannot be held liable as a director for faults committed before your term of office began. Nor can you be held liable for damage caused by offences committed after your term of office has ended.
You can therefore only be held liable for misconduct (by yourself or, in some cases, by other members of the administrative body) from the time of your appointment until the end of your term of office (e.g. in case of dismissal).
But beware: inaction can also be an offence. If you find that in the period prior to your term of office, offences were committed, and that these are still running, you may, by not acting, also be at fault and thus risk liability for this fault.
A director who was not involved in a wrongdoing and who reports this wrongdoing to the other members of the administrative body escapes joint and several liability.
It is therefore important that you discuss with the other directors what you think is wrong or was wrong. If there are still differences of opinion, it is important that you record them in the minutes of the meeting and that you relinquish your mandate at the last minute.
Joint and several liability
There are situations where the plaintiff does not have to prove individual fault in order to engage the liability of the director. This plaintiff is in this case the tax authorities or the NSSO.
These are the following situations:
repeated non-payment of withholding tax and/or VAT ;
non-payment of NSSO debts if, during the previous five years, the director in question has twice been involved in a bankruptcy or liquidation with NSSO debts.
In both these cases, it does not matter whether you were remotely or closely involved: you will have to pay for the damage.
Finally, there is article XX-227 of the Code of Economic Law (CDE). Since 1 May 2018, this article provides for liability on the part of directors for "wrongful trading" (the manifestly unreasonable pursuit of a loss-making activity). This is also a provision to bear in mind if the company engages you as a crisis manager.