Directors’ liability in case of insolvency and fraud: recent developments in Belgium

07 September 2007

In Belgium, the board of directors has the power (but also, to some extent, the obligation) to do all things and take all measures which are necessary or useful to accomplish the corporate purpose of the company, with the exception of such things and measures which are expressly reserved, by law or by the articles of incorporation, for the shareholders.

In principle, the board must act collectively and, in practice, decisions are taken by majority vote. However, Belgian law emphasises each director’s individual duty to properly prepare and participate in the decision-making process and monitor the company, not least because director’s liability is still, to a large extent, assessed individually.

Directors’ liability in general

Directors are responsible for the performance of their duties and are individually liable to the company for any shortcoming. The extent of this duty of care is determined according to the professional skills which can reasonably be expected from a “normally prudent and reasonable” person facing the same factual circumstances. A claim may be brought:

  1. further to the decision of the shareholders at a members’ meeting; or

  2. on behalf of the company, by minority shareholders owning securities representing:

    1. at least 1 per cent of the voting rights of all the securities issued by the company; or

    2. at least €1,250,000 of the total share capital.

Directors are also jointly and severally liable to the company and third parties for any loss suffered as a consequence of a breach of the provisions of the Belgian Companies Code or of the company’s articles of incorporation. An individual director can only avoid such liability by providing evidence that he / she has not participated in the violation and has informed the shareholders’ meeting immediately of such violation.

Directors are also subject to the general principles of Belgian tort law (Articles 1382-1383 of the Civil Code). Any person who acts wrongfully and thereby causes damage to another person is under an obligation to indemnify such person for the damage suffered. However, a third party must prove that the director has breached a general duty of care (separate from his contractual duties owed to the company) and that the director has caused damage which can be distinguished from any damage caused by the poor performance of his / her contractual duties.

Directors can be discharged from negligence liability by a special decision of the shareholders at the annual general meeting. If such discharge has been validly granted, only those shareholders who have not voted in favour of the discharge may claim damages from directors.

The discharge is only valid if the annual accounts do not contain any omission or misstatement, and if any breach of the Belgian Companies Code, or of the articles of incorporation, has been specifically mentioned in the notice to the meeting.

Insolvency and fraud situations

The general duties of directors also apply to insolvency and fraud situations but they have also been reinforced by specific provisions. We have set out below a brief summary of these specific provisions.

In case of company bankruptcy, any director or person who had de facto authority to manage the company may be held personally liable (whether or not jointly and severally) for:

  1. all or any part of the debts of the company up to the amount by which the company’s debts exceed its assets;

  2. if it is established that a manifestly serious mistake has contributed to the company bankruptcy.

An Act passed on 20 July 2006 (which came into force on 28 July 2006) introduced additional liability for company directors if their company failed to pay “salary withholding taxes” or VAT. In particular, directors may be joint and severally liable if the tax authorities can demonstrate that the directors committed a fault (within the meaning of article 1382 of the Civil Code).

A fault is presumed to have been committed if “salary withholding taxes” or VAT repeatedly remain unpaid (i.e. when two monthly instalments or three quarterly instalments of tax payments have been outstanding for more than one year). This presumption does not, however, apply where the failure to pay is due to the company’s financial difficulties which subsequently lead to liquidation.

A similar liability regime was introduced (from 1 September 2006) for unpaid social security levies, but only to the extent that company bankruptcy has been declared and at least one of the directors has already been involved in a company bankruptcy situation in which social security levies remained unpaid.

Directors may be sued in their personal capacity (sometimes even together with the company) if the alleged wrongdoings involve fraud or criminal offences - even where criminal sanctions are imposed on companies. The number of criminal prosecutions has increased significantly in recent years.