We are frequently asked to explain the rules regarding director liability. One reason why this topic is currently top of mind is that fulfilling a director’s mandate properly has become more difficult thanks to an increasingly complex regulatory framework. Rules about cyber and data protection (GDPR), whistleblowing, the environment and competition law, not to mention the risks and opportunities relating to IP, and Environmental Social and Governance (ESG) aspects, have all increased the possibility of director error. And reports in the media show that the risk is not just a theoretical one, with cases being highlighted both world-wide and in Belgium (Optima, FNG, Fortis, etc.)
Not only this, but the new Belgian Code on Companies and Associations (“BCCA”) recently updated and modified the rules about directors’ liability (in combination with the Code of Economic law in relation to insolvency).
High time for a webinar on this subject, therefore, and we invite you to attend our IBJ webinar on April 27, 2021. In this blog article, we already discuss some of the general issues. During the webinar, we will look at some of the specific provisions that can trigger liability under the BCCA or the Code on Economic Law, and we will examine some practical examples. We will also provide directors with the tools to effectively reduce their risk of criminal liability, and Zurich Insurance will give us the benefit of its practical experience in this area.
2. Director’s liability according to the new Belgian Code of Companies and Associations
Belgian company law underwent a comprehensive reform when the BCCA entered into force. Several of the amendments were intended to improve flexibility, thus allowing Belgium to keep pace with its neighboring countries and become a more attractive and competitive destination for foreign businesses. As part of that exercise, the rules on director’s liability were recast into a coherent, over-arching regime that applies to the directors of all legal entities that fall within the scope of the BCCA. The rules on directors' liability are in Book II, Article 2:56 and following, of the BCCA.
The new BCCA first introduces a positive obligation on directors in Article 2:51: each member of a governing body, or in charge of daily management, is accountable to the company for the proper performance of his or her task. Article 2.52 BCCA specifies that in situations where continuity is at stake the governing body must deliberate on measures to be taken to ensure the continuity of the economic activity for a minimum duration of 12 months.
2.1. Who can be held responsible
It is not only directors or persons in charge of daily management that can be held liable. The new BCCA provides that all its rules on directors' liability also apply to so-called de facto directors (i.e., persons who have not been appointed as directors, but who perform (or have performed) management tasks). Our reference to “directors” in this article should be read to also include such de facto directors.
If the director is a legal entity, the representative of this legal entity can be held liable in the same way as a director.
2.2. Contractual and extracontractual liability
Belgian directors are liable towards the company (“internal liability”) for damage caused by faults committed during the performance of their duties as directors. This is a contractual liability. Such claim (“actio mandati”) can, in principle, only be initiated by the general meeting of shareholders of the company (or by the receiver or liquidator), although there may be other possible claimants (such as a minority shareholder’s claim).
Directors can also be held liable towards third parties (“external liability”) if the fault is an extra-contractual fault, such as a criminal offense.
2.3. When can a director be held liable – how is this evaluated?
Directors can only be held liable for “decisions, acts or behavior which are obviously outside the margin within which normally careful and prudent directors, placed in the same circumstances, my reasonably have a difference of opinion”. This “reasonableness” is in line with the “bonus pater familias” principle (or, under the new Civil Code, what would be expected of the “prudent and reasonable person”).
The BCCA confirms that a court must perform a "marginal assessment." This means that the court must have regard to what would have been reasonable at the time that the decision was made, rather than viewing it with the benefit of hindsight.
Examples of case law, where courts have found unreasonable behavior after applying a marginal assessment, have related, for example, to the systematic non-payment of taxes and VAT (false appearance of solvency), the breach of non-competition obligations, the misuse of corporate assets, and interim dividend distribution without considering the losses of the current financial year.
Directors can be held liable for normal management mistakes, and for breaches of the articles of association or of the BCCA. It goes without saying that the courts have less margin of appreciation with respect to the latter.
2.4. Joint liability
The liability of the directors for normal management mistakes is joint and several if there is a collegial body. Liability is always joint and several if it concerns breaches of the articles of association or the BCCA.
However, it is possible for directors to try to escape liability, namely by proving that they had no part in the mistake (for example, if the director can prove absence during a meeting when a particular decision was taken, or demonstrate a clear dissenting opinion). In order to avoid liability, the director must inform his or her colleagues (or, as the case may be, the collegial body or the supervisory body). In case there is a collegial body (or supervisory body), this notification, as well as the subsequent discussion, must be mentioned in the meeting minutes.
2.5. Financial Cap
Perhaps the most talked-about change introduced by the BCCA is the introduction of a cap on the amount for which directors can be held liable. This cap is proportionate to the size of the legal entity, based on its balance sheet total and turnover.
The cap thus introduces a maximum liability for directors (including liability on the basis of other legislation, such as under Article XX.227 of the Code on Economic law), which applies both towards the legal entity and third parties for both contractual and extra-contractual liability. The financial cap applies to all directors (as a group) and each event (or combination of events) that gives rise to liability, regardless of the number of claimants or claims.
However, a last-minute change by the legislator (in order to prevent a situation arising whereby the liability of employees under Article 18 of the Belgian Act on Employment Agreements would be broader than the liability of directors), resulted in the cap not applying in certain circumstances, such as when a minor fault occurs too commonly to be by coincidence, or when there is serious fault, fraudulent intent or intention to harm. This hence means that in many cases, the cap will not apply.
Finally, the BCCA prohibits any further limitation of liability in contracts, unilateral declarations or the articles of association, and prohibits exoneration or indemnity clauses undertaken by the company itself, its subsidiaries or controlled entities. However, this means that parent companies, shareholders and controlling entities are still allowed to undertake to exonerate or indemnify the directors. Moreover, the legal entity can still pay for D&O insurance for the benefit of its directors.
2.6. Statute of limitation
The period of limitation for all claims regarding director’s liability is relatively short: five years from the date of the decisions, acts or behavior or, if they have intentionally been hidden, from when they were discovered.
3. Directors’ criminal liability
Perhaps more than you would think, directors can become exposed to criminal liability. In addition to being liable for certain acts that they themselves commit in this capacity, they are increasingly at risk of being prosecuted for offences committed by or within the company. In other words, directors may have to bear the criminal consequences for acts or omissions committed by their company’s employees or agents, i.e., people over whom they have a power of control or supervision.
There are several specific criminal offences which can lead to criminal liability for directors, including the deliberate filing of incorrect or false annual accounts, the distribution of fictitious dividends, fraud, breach of trust, and counterfeiting. It is not our aim to provide an exhaustive list of possible offences here, suffice it to say that most of these criminal offences fall within the scope of business, economic, social or tax law.
One of the particularities of the Belgian system is that it recognizes the criminal liability of legal entities such as companies. The Belgian Criminal Code provides that a company may be held criminally liable for offences that are intrinsically related to its aim or its interests or that are committed on the company’s behalf.
Since the amendment of Article 5 of the Belgian Criminal Code on 30 July 2018, the company and its directors can both be held criminally liable for the same facts. Consequently, directors can no longer escape criminal liability by arguing that the most serious crime was committed by the legal entity (something that was possible under the old regime). And there are no official guidelines on whether a prosecution should be brought against the company or a specific individual, so proceedings are often brought against both.
To reduce the risk of criminal liability, directors should ensure that policies designed to prevent the commission of offences within the company are effectively implemented within the company. They may also wish to delegate authority, thereby transferring their responsibility to such persons as are in the proper position to supervise, and they can rely on D&O liability insurance.
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