12 Feb 2021 Personal liability of directors for phantom invoices!
If a director acts unlawfully towards the company, he may be required to compensate the damage suffered by the company. The court in Overijssel recently ruled that a former director of an installation company was liable for the company's loss due to the acceptance of approximately €1.5 million in fake invoices.
In this case, an employee who had worked for the installation company for many years in various positions, was appointed as director. After his appointment, the shareholders commissioned a consultancy to investigate the company's culture because of staff dissatisfaction. The report revealed that there were an unusually large number of signs pointing to integrity issues. For example, two carpet wholesalers had for years been drawing up phantom invoices for laminate and carpet that had never been ordered or delivered. The installation company did not trade in them either. In addition, a "black money circuit" was found to exist.
The director was suspended and ultimately dismissed and faced a very substantial claim for damages. The installation company accused its former director of having swindled the installation company out of money for years by means of invoices for non-existent deliveries of carpets ("phantom invoices") and demanded the return of the funds.
The director did not deny that the phantom invoices had been made and that no carpets had ever been delivered for them. According to the director, this was normal business practice for the installation company and the money simply flowed back into the company. In exchange for paying the phantom invoices to the two carpet wholesalers, he received 90% of the amount of the invoices in cash, with a 10% commission deduction. The cash was used to fill the black coffers. The money was used to pay for all sorts of expenses, such as sponsoring the local football club and paying employees overtime. The predecessors of the director allegedly instructed him to maintain the black money circuit. This was denied by the installation company.
A director is obliged to properly fulfil his duties towards the company. If he fails to do so, he can be required to compensate the company's loss if the director can be blamed for a serious personal fault or if he himself acts unlawfully towards the company.
In this case, the court ruled that the former director had acted unlawfully towards the installation company by paying the phantom invoices, while the director knew that the installation company would not obtain the goods invoiced for them. The director's defence that the company culture or instructions from a predecessor were involved was of no avail to him. He was expected to resist external pressure.
The director himself could and should have realised that the behaviour described above was unacceptable and that others within the Installation Company would not agree to the Installation Company being charged costs that were not matched by any performance, or any other performance unrelated to normal business operations. This was also evidenced by the fact that concealment actions had taken place (incorrect description of the invoice). The director was therefore found liable for the installation company's loss.
If you have any questions or need advice about directors' liability, please feel free to contact one of our lawyers. We will be happy to assist you!