Special liability of directors in bankruptcy
April 2022 – Special directors' liability does not apply to directors of small bankrupt companies. But who has to prove that the company is small? The creditors/guardians? Or the directors/managers? The Court of Cassation ruled at the end of 2021.
Liability of directors
In the event of a loss-making bankruptcy, it is obviously in the interest of the creditors to include as many debtors as possible in their claims, in addition to the company. It is not uncommon in such cases to consider the possibility of seizing the private assets of directors. In practice, there are in fact two possibilities for doing so. A first option is ordinary directors' liability: if the creditors (or the receiver acting on behalf of the creditors) can prove that there has been a breach of the Companies and Associations Code (CSA) or the company's articles of association, they can hold the director concerned liable on this basis.
But this action has some disadvantages:
If the company has granted discharge to the directors, this possibility is excluded.
The liability is personal: this means that the creditors have to prove for each individual director that he has violated the CSA or the articles of association.
Finally, the damage must also be proven, as well as the link between the fault and the damage.
Special liability of directors
The second possibility is not contained in the CSA, but in the Code of Economic Law (CDE). Article XX.225 of the CDE provides that in the event of bankruptcy in which a loss is incurred and if it is established that a serious and characterised fault on their part contributed to the bankruptcy, any current or former director, manager, delegate for day-to-day management, member of the management committee or of the supervisory board, as well as any other person who has effectively held the power to manage the company, may be declared personally liable, with or without joint and several liabilities, for all or part of the company's debts up to the amount of the insufficiency of assets.
We can infer various elements from the text of the law.
Firstly: the liability action can concern many people. Not only those who formally acted as directors of the company but also de facto directors. This is still a matter of discussion.
Secondly: liability action is only possible if:
a) there is a question of a loss-making bankruptcy, and
b) the persons concerned have committed a serious and characterised fault that contributed to the bankruptcy.
The loss-making nature of bankruptcy is generally not open to discussion. However, the existence of serious and gross negligence is.
Case law and doctrine speak of a serious and characterised fault when the person concerned has not acted as a normally prudent and diligent director would have done in the same circumstances. In this respect, the judge is not authorised to rule on the appropriateness of strategic decisions. It is only a question of establishing that the director has committed a fault that does not correspond to what the companies or even society in general expects of him, and that the person concerned knew or could have known that this would cause damage.
The exception
Once all the above elements are established, there is a possibility of compensation. However, there is an exception to this principle. The special liability does not apply if the bankrupt company has had an average turnover of less than 620 000 euros excluding value added tax in the three financial years preceding the bankruptcy, or in all financial years if the company has been in existence for less than three years, and if the balance sheet total for the last financial year did not exceed 370 000 euros.
The question the Court of Cassation answered on 2 December 2021 was who bears the burden of proving that the exception applies: the administrator or the curator. The Court did not waste words: according to the Court, it follows from the joint reading of these provisions of law that it is up to the manager to prove that the [...] thresholds have not been exceeded, so that [the special liability of administrators] cannot be applied to him.
This means that the burden of proof lies with the directors and managers. It is up to them to prove that the company in which they were directors, managers, etc. remains below the thresholds. If they fail to provide this proof, the receiver (or the creditors) can pursue the action to hold the directors liable for serious and gross negligence.
