Maxim Hodak discusses the pitfalls of directors ‘and shareholders’ responsibilities in Dutch company law
Eindhoven, 19 July 2022 / EZPress / – With the growing popularity of entrepreneurship, the disadvantages and risks of running a business are often underestimated. Dutch lawyer Maxim Hodak of Law & More predicts the increase in the number of bankruptcies as a result of the recession and points out the importance of raising awareness of the responsibilities of directors and shareholders.
Despite such widespread popularity, entrepreneurship involves many foreseeable and unforeseen risks. Surprisingly, many directors and shareholders often share the common belief that their personal responsibilities will cease once the legal entity is established. Following the latest recession forecasts, lawyer Maxim Hodak discusses the pitfalls of CEO and shareholder responsibility. The lawyer answers frequently asked questions about significant legal matters and shares his tips for limiting the risks.
The responsibilities of the board of directors and shareholders play an important role in a company’s success and failure. Statistically, the number of bankruptcies in 2021 in the Netherlands was the lowest in 31 years. Experts say these figures are skewed because of the government’s emergency preparedness and the court’s tendency to make healthy companies less likely to file for bankruptcy. According to Maxim, fewer bankruptcies does not mean that the risks are now lower, in contrast to the pre-pandemic. His forecast comes very timely with the latest news of the impending economic recession.
How would you explain the director’s responsibilities?
By law, a legal entity exists only on paper and needs a person who can act on its behalf. Therefore, legal persons are represented by a board of directors that performs legal acts, such as entering into contracts, acquiring property and debts, or initiating legal proceedings. Directors bind the legal entities with these acts. As they are in principle directors of the Dutch private limited company (BV), they are not personally responsible for these actions and the consequences thereof with their private assets. Of course, there are exceptions to this rule when directors are accused of mismanaging the company and held accountable for their personal assets.
When are directors personally responsible?
The risk of personal liability always exists. Most importantly, there are two types of director responsibilities: internal and external. In the event of external liability, the driver is liable to third parties such as suppliers and customers. Internal liability involves liability to the company (the legal entity) even for negligence or mismanagement.
The Civil Code defines poor management very broadly and assigns areas of responsibility such as activities performed, their nature, risks, division of tasks in the board of directors and administrative activity. The use of information that the director has or must have at his disposal when deciding or assessing the activity can also have an impact on the outcome of the case. Activities that are in violation of the articles of association can have serious consequences for the company and the director himself.
What is considered maladministration?
The list of actions that can be considered errors or omissions is extensive. This includes, for example, many actions and decisions that lead to financial mismanagement. Examples of such actions are the withdrawal of assets from the legal entity and their use as private assets. Another example is the confusion of private enterprise with the business of the legal person and competition with the legal person. In particular, to subordinate to the interests of the legal person private interests or the interests of third parties. In addition, unauthorized binding of the legal person to third parties, unnecessarily large financial risks and decisions with far-reaching financial consequences can be considered as mismanagement. The conclusion of transactions that significantly exceed the financial resources of the legal entity without proper preparation may be considered irresponsible and may lead to liabilities. In addition to financial consequences, neglect or non-occurrence of thin capitalization, debt build-up, poor credit monitoring and insurance management can be seen as acts of poor management.
How can drivers defend themselves?
The allegations of maladministration apply to the entire board, which is fully liable under the law. In some cases, directors may absolve themselves of this responsibility by proving that the serious charge cannot be blamed on them. They must also demonstrate that they have not been negligent in preventing mismanagement.
Protesting against the policies pursued by the board will not be considered sufficient evidence. The Director is expected to oppose any decision he / she does not support and to limit the consequences of maladministration. The Director shall note in writing that he has warned of possible negative consequences and describe the measures he has taken to prevent them. In some cases, directors may be forced to resign to avoid liability if the board ignores the warning.
Board members are expected to be well aware of all the facts and circumstances when it comes to making decisions, especially those relating to financial management. He or she cannot be evaded responsibility due to the division of tasks on the board. Only in some cases can they apologize for misinformation.
When does shareholder liability apply?
Under Dutch law, shareholders can also be personally liable for their actions in a company. Personal liability can have major consequences for a shareholder’s privacy. It is therefore important to be aware of the risks that arise from shareholder liability.
First, shareholders have three types of obligations: legal obligations, obligations arising from the articles of association and obligations arising from the shareholders’ agreement. Shareholders are required by law to pay the company for the shares they acquire. In the event of bankruptcy, shareholders are required to pay in full for all shares. The articles of association may extend the shareholders’ liability and require that he or she be held personally liable for the company’s debts. In some cases, shareholders may enter into an agreement with additional rights and obligations.
Shareholders can be charged with illegal acts by selling shares to third parties. In certain circumstances, a shareholder may be held personally liable if he transfers his shares to a third party, and this transfer means that the company is unable to pay its creditors.
In addition, shareholders may give instructions to the Board of Directors, which the Board of Directors is obliged to follow, unless these instructions are in conflict with the company’s interests or the articles of association. Nevertheless, shareholders may not assume the role of director. If they act as directors, they are considered as policy makers and are treated as directors. This means that they can be held liable on the basis of directorial liability if, for example, the company goes bankrupt.
Although a company is liable for damages resulting from its actions, directors and shareholders may also be held personally liable in certain situations. Failure to comply with legal obligations and illegal acts may result in liability for directors and shareholders with their personal assets. Shareholders are obliged to comply with the articles of association and the shareholders’ agreement. In some cases, shareholders unconsciously act as directors and thus risk themselves directorial responsibility. To limit risks, it is important to consult a lawyer quickly.
About Maxim Hodak
Maxim Hodak is a lawyer based in the Netherlands. Maxim has extensive legal expertise in company law and company law. Maxim is fluent in Dutch, German, French, English, Russian and Ukrainian and is a magnet for multinational companies. His career spans more than 20 years as a lawyer and was a pioneer in establishing compliance in several EU jurisdictions. Thanks to the efforts of Maxim and his team, entrepreneurs and SMEs meet all standards of Dutch law and the laws of other EU countries.
Maxim Hodak started his legal career at Clifford Chance Brussels in 2002. He subsequently provided legal advice at ING Bank in the Netherlands. In 2005, he joined an international television channel as general counsel and general manager of the holding company to support the unit from the Netherlands in its international growth and expansion. Since 2009, Maxim Hodak has specialized in company and contract law, international taxation, asset structuring and project financing.
Maxim Hodak holds a Master’s degree in Law (University of Amsterdam) and Management of Business Administration (MBA) (TIASNimbas in Tilburg) and a postgraduate degree in Investment Finance (EHSAL Management School, Brussels). He is constantly involved in advanced Dutch legal and business studies.
Maxim Hodak is available for an on-demand interview.
Contact Maxim Hodak for legal advice via https://lawandmore.nl and https://hodak.nl.
About law and more
Law & More is a dynamic multidisciplinary Dutch law and tax consultancy specializing in Dutch company, commercial and tax law with offices in Eindhoven and Amsterdam. The office combines its business and tax background and know-how from a large office with the attention to detail and bespoke service that you would expect from a boutique office. Law & More provides its services to a range of Dutch and international clients, from companies and institutions to high-profile individuals. A dedicated team of multilingual lawyers and tax advisers have in-depth knowledge of various aspects of Dutch and international law. The company also excels at structuring assets and activities in a tax-efficient way. Law & More is also a member of the LCS network of lawyers based in Amsterdam, The Hague, Brussels and Valencia.
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