Directors’ and officers’ liability: walking on eggshells

Director of egg trading company not liable for unpaid invoices from suppliers

In case law on directors’ and officers’ liability it is a recurring theme: the director of a company in dire straits who nevertheless continues to purchase products from suppliers, with all the risks that entails. In a recent ruling, the director is well off, even though he had been warned in advance.

The case concerned an egg business. The director in question was an (indirect) shareholder together with his brother. The eggs were bought from large poultry farmers and then sold on to the food processing industry. Unfortunately, the company ran into difficulties. This led to bankruptcy of the company at its own request in September 2017.

Three suppliers of eggs held the director personally liable for their unpaid invoices. These suppliers had delivered eggs to the company until June 2017 and blamed the director for continuing to order eggs, even though the director knew that the company was in dire straits.

The suppliers' claim was based on Section 6:162 of the Dutch Civil Code (tort), in light of the established case law of Beklamel, New Holland Belgium and Ontvanger/Roelofsen. From this case law it appears there is personal liability of a director if he/she can be blamed for a serious personal fault, for example if he/she enters into obligations of which he/she knows in advance that the company will not be able to fulfil them and will not be able to provide redress.

Background: in 2014 and 2015, the egg business made a loss. In 2015 and 2016, the accountant had pointed out in the notes to the annual accounts that it was uncertain whether the company would be able to continue to exist. This was in view of the losses and the ratio of current liabilities to the total assets. In addition, at the end of 2016, a financial advisor wrote:

"Because there are negative assets and the creditors cannot be paid and/or cannot be paid on time, there is a serious threat of directors' liability. In legal terms, this is called assuming obligations when one should have known that one cannot fulfil them in the long run. This is a grey area and to be sure, I advise you to have it checked by an insolvency lawyer. (...)

The risks of directors' liability are considerably/unacceptably high and I recommend taking the appropriate steps in this regard as soon as possible on the basis of the 2016 figures to be provided. These decisions must be taken by 15 January 2017 at the latest, as any further delay is irresponsible."

In early March 2017, the bank pulled the plug on the company's credit, giving three months’ notice. However, the three egg suppliers continued to deliver into May and June 2017. The unpaid invoices amounted to €84,483.94, €51,078.00 and €26,477.84. In mid-June 2017, the bank blocked the company's credit facility. Bankruptcy followed at the end of September 2017, at the company's own request.

The question at issue here is: how long may a director continue to purchase goods from suppliers, if he has already been warned by the accountant and the financial advisor about the continuity of the company and the risk of directors’ liability? And should a supplier himself be aware of the content of a warning by the accountant in the annual accounts?

According to the court, the director in this case is not personally liable. This is substantiated - among other things - as follows:

“As long as [director] was able to believe that [company name] had real possibilities of continuing to exist, he cannot be blamed for making efforts to realise those possibilities for [company name]. In order to do so, he had to continue to deliver eggs and consequently also to purchase eggs. By doing so without explicitly pointing out to his suppliers the financial situation of [company name], it is true that he also took a certain risk for them, but on the other hand, it has not been sufficiently disputed that they were aware or could have been aware of the risk they were running if they delivered eggs to [company name] based on the published 2015 financial statements and information in the market and that they could also have actively informed themselves.”

In short: the director was not personally liable for the unpaid invoices. You can read the entire judgment, including further background and motivation of the court, here.

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