Accountability of leaders in difficult times: when does leadership become hardship?
The tasks and responsibilities of directors, CEOs, CFOs and other executives are extensive and not always easy, not least in uncertain times. With responsibility comes liability. Therefore, we outline below some important liability principles - especially in times of COVID-19.
Director? Executive director? De facto director?
A director is a natural or legal person appointed by the general meeting of the company. His or her appointment is, in principle, published in the appendices to the Belgian Official Gazette.
Since the entry into force of the new Belgian Company Code (BCC), the so-called executive director (“dagelijks bestuurder”/”administrateur journalier”) – entrusted with the daily management of the company – is also formally covered by this concept (even though they are normally appointed by the board of directors).
Chief officers, executives, managers or other persons having actual management authority (without having been formally appointed as a director) must also be cautious. As so-called “de facto directors”, they can be held liable to the same extent as the (executive) director. The following principles therefore also apply to them.
Grounds for liability
In general, a four-part distinction is made between the kinds of errors for which directors can be held liable.
Directors are expected to comply with the company’s articles of association as well as the provisions of the BCC. In the event of an infringement, they can be held jointly and severally liable, both by the company and by third parties.
In addition, directors must always act ‘normally’ and ‘carefully’ (“goede huisvader”/”bon père de famille”). For any decision, act or omission that any other director would have never taken or made in those (same) circumstances, the director may be held personally liable. When there is a board of directors, each member can be held jointly and severally liable.
Directors may also be held personally liable by third parties for criminal (or other non-contractual) errors (and damages).
Finally, there are also important specific circumstances in which a (executive) director or de facto director (e.g. CEO, COO, manager) must be careful and vigilant in uncertain times.
Jeopardized continuity (12 months …)
If there are important and corresponding facts that could jeopardize the continuity of the company (e.g. the consequences of COVID-19), the BCC (article 2:52) imposes an obligation on the governing body of the company to deliberate on possible measures in order to safeguard the continuity of the economic activity for at least twelve months.
A director must therefore continuously monitor the microeconomic situation of the company and, if necessary, discuss and propose measures to deal with a possible situation of discontinuity in the course of the next twelve months. Any breach of this obligation may lead to the joint and several liability of the directors.
Alarm bell procedure
Each director must ensure that the net assets of the company are not negative or likely to become negative (BV/SRL: article 5:153, par. 1) or decrease to less than half of the share capital (NV/SA: article 7:228).
In such cases, the directors are obliged to apply the so-called alarm bell procedure. For the BV/SRL, this must also be done when the directors establish that the company is no longer able to pay its payable debts for the next twelve months (article 5:153, par. 2).
The alarm bell procedure entails that the directors must convene a special general meeting of the shareholders in order to (i) either dissolve the company, or (ii) take measures to continue the company. In the latter case, the directors will have to draw up a special report containing the proposed measures to restore continuity.
If the alarm bell procedure is not applied in due time (within two months) or is not correctly applied, the directors may be held jointly and severally liable for any damage suffered by third parties as a result of this non-compliance (presumption of liability).
Liquidity test for distributions (SRL/BV)
Since the entry into force of the BCC, directors of SRLs/BVs have to carry out a liquidity test for so-called distributions to shareholders and directors (article 5:143). In particular, directors must establish that the distribution will not result in the company being unable to pay its “reasonably foreseeable” payable debts for the next twelve months. This decision of the directors must be justified in a report.
In the event of failure to comply with the liquidity test, directors risk joint and several liability, both towards the company and towards third parties.
Insolvency liability
Some liability rules apply specifically to directors in the event of bankruptcy of the company.
A director risks joint and several liability for part or all of the debts if they committed a manifestly gross error that contributed to the bankruptcy of the company. This concerns errors that any other careful director in the same circumstances would not have committed.
Wrongful trading
Directors risk the same liability if they continue to run a manifestly lost business, even though they knew or should have known that there was no reasonable chance of survival for the company.
Any imprudence on the part of a director after the ‘tipping point’ at which the company was apparently lost, may lead to their joint and several liability for all or part of the debts.
Liability for fiscal and social debts
Both during the company’s lifetime and in the event of bankruptcy, directors may be held jointly and severally liable for the payment of tax debts (i.e. payroll tax and VAT), if the non-payment is due to an error on the part of the directors.
However, the burden of proof of this error lies with the tax authorities and the court will have to assess whether any other director would have acted differently in the same circumstances.
The non-payment of social and fiscal debts does not automatically constitute an error. There may be special circumstances that justify why, for example, priority was given to payment of other debts.
In certain circumstances, however, the burden of proof is reversed and the director must prove that they have not committed an error, i.e. if (i) at least 3 payable debts have not been paid within the year (in case of monthly payments), or if (ii) at least 2 payable debts have not been paid within the year (in case of quarterly payments).
Furthermore, with regard to unpaid social security contributions, both the current and former (also executive) directors of a bankrupt company can be held personally, jointly and severally liable for the payable social security contributions, if they were (i) involved in at least 2 bankruptcies or liquidations with unpaid social security debts in the 5 years prior to the bankruptcy, and (ii) if they also had the capacity of (actual) director at that time.
Some take-aways
In order to avoid liability, the (de facto, executive or ordinary) director should closely and regularly evaluate the company’s situation and follow all legal procedures.
While a director enjoys a wide margin of discretion and a judge may (in principle) not assess the appropriateness of a decision a posteriori, it is essential that every decision (or postponement thereof) and every action is properly substantiated and recorded in the minutes of meetings (or in another written way).
In this respect, professional assistance may not only be advisable, but may later prove to be of great importance.