Introduction
Article 2:9 of the Civil Code regulates internal directors’ liability: a director can be held personally liable to the company itself in the event of improper performance of duties and if he is seriously at fault. This provision forms the basis for the relationship between directors and legal entities in Dutch corporate law; to this end, the law refers to the careful performance of duties that may be expected of a director.
The concept of ‘proper management’ is complex and has various legal and organisational interpretations. This concept is used to indicate the degree of care and responsibility required of directors when making decisions and managing risks.
The distinction with external liability is essential. Internal liability relates to damage suffered by the company as a result of the actions of its own director, while external liability relates to injured third parties or creditors. External liability, on the other hand, concerns claims by third parties such as creditors, based on Articles 2:138/148 of the Dutch Civil Code in the event of bankruptcy or Article 6:162 of the Dutch Civil Code concerning unlawful acts.
This explanation is primarily intended for directors of private limited companies, public limited companies and other legal entities who wish to gain insight into their personal liability risks. Supervisory directors, shareholders and legal advisers will also find practical guidance here. Directors have obligations to perform their statutory and contractual duties with due care. Entrepreneurship entails responsibilities, whereby directors must act in the interests of the company and avoid careless behaviour that could harm the company or its creditors.
Key question answered: Pursuant to Section 2:9 of the Dutch Civil Code, a director is liable if he has performed his duties improperly and can be sufficiently seriously blamed for this, with the legal entity being the only party that can bring a claim. Standards of reasonableness and fairness play an important role in assessing the threshold of serious blame.
Key insights from this article:
- The high threshold of serious blame protects normal policy decisions
- Collective liability applies in the case of multi-headed management, with limited possibilities for exoneration
- Specific situations such as poor administration or violation of statutory provisions are risk areas
- Prevention through adequate governance structures is more effective than defence after the fact
- Having risk management and internal control in order is essential to prevent improper management and liability
- There is a close relationship between risk management, internal systems and policy choices made by the board
Fundamental principles of Article 2:9 of the Dutch Civil Code
Article 2:9 of the Dutch Civil Code codifies the duty of care and the obligations that every director has towards the legal entity. Paragraph 1 stipulates that every director is obliged to perform his duties properly towards the legal entity. Paragraph 2 specifies that the director’s liability arises in the event of improper management linked to a serious reproach, with the company as the exclusive claimant.
The term ‘proper performance of duties’ is interpreted in legal terms as the actions of a director as might be expected of a reasonably competent and careful director. This concept involves assessing the conduct of directors on the basis of the circumstances of the case. There is a close relationship between the duty of care of directors and the policy choices they make; careful and responsible policy choices are essential to meet the legal standard.
Proper Performance of Duties
The law imposes an obligation on every director to perform his duties properly. This standard arises from the fiduciary relationship between the director and the legal entity. It is a standard of care that requires the director to put the interests of the company first.
Improper management is a failure to exercise the required care that a reasonable and experienced director would exercise in the same situation.
The test is that of a reasonably acting director. This criterion asks what a competent and careful director would have done in similar circumstances. The concept of ‘proper performance of duties’ means that directors perform their duties with the care and responsibility that may be expected of them. In addition, directors are expected to always act in the interests of the company and its creditors when doing business, and to fulfil their legal and contractual obligations. In doing so, the court weighs up the available information, the nature of the company and the specific situation in which the decision was made.
Serious Reproach as a Threshold
Not every mistake leads to liability. In the Staleman/Van de Ven judgment (ECLI:NL:HR:1997:ZC2243), the Supreme Court ruled that only serious blame can lead to liability. This high threshold respects the policy freedom of directors and prevents every unfavourable result from leading to liability in retrospect. Case law has further defined the concept of ‘proper’: a director is expected to act as a reasonably acting and experienced director who, in the same circumstances, would have refrained from making the same decision.
When assessing whether a sufficiently serious reproach can be made, the court weighs up all the circumstances of the case. In doing so, the criterion of reasonableness plays a significant role in determining whether the director’s actions can be considered seriously reprehensible. The concept of ‘serious blame’ means that the director’s actions or omissions are so negligent that a reasonably acting director would not have committed them. Relevant factors include the nature of the activities carried out by the legal entity, the risks generally arising from those activities, the division of tasks within the board, any guidelines, the information available or that should have been available to the director, and the manner in which the board could reasonably have reached its decision in the given circumstances.
Collective liability
In the case of a multi-headed board, the principle of collective responsibility applies. In principle, improper management by one director makes all co-directors jointly and severally liable for the entire damage. This stems from their joint responsibility for the overall policy of the company. It is therefore very important that internal control and risk management within the organisation are in order in order to prevent improper management and liability.
An individual director can exonerate himself by demonstrating that he is not personally at fault and that he has not been negligent in taking measures to avert the consequences of the improper management. However, this possibility of exoneration is limited in the case of tasks that are inherently collegial, such as financial supervision or risk management. The collective responsibility of the board relates directly to the functioning of internal systems and procedures. Board regulations that divide tasks do not relieve fellow directors of their collective responsibility for such core obligations, such as compliance with legal and contractual obligations.
Collective liability is an important point of attention: case law shows that in approximately 40% of internal claims, collegial liability is decisive for the outcome of the proceedings.
Practical areas of application
Internal directors’ liability manifests itself in specific situations that can affect any board. It is very important that order within the company in the area of risk management and internal control is properly safeguarded in order to prevent improper management and liability. When doing business, directors have a responsibility to act carefully in the interests of the company and its creditors. Decisions about risk management and any deviations from internal guidelines directly relate to the care and responsible policy choices within the organisation. Practice shows that certain behaviours and omissions systematically lead to liability claims. The most common risk areas are discussed below.
Risk management and internal control
A director is obliged to set up adequate systems for risk management and internal control. These obligations mean that directors must ensure that the systems and procedures are in order to prevent improper management and liability. The importance of order in risk management and internal control is great, because the absence or malfunctioning of these systems can lead to mismanagement and personal liability. The nature and scope of these systems depend on the size and complexity of the company, but their complete absence will almost certainly result in serious criticism.
Structural negligence in financial administration is a classic example of apparent improper management. If the administration is so deficient that the management does not have an adequate overview of the company’s financial position, it will be difficult for the director in question to defend himself. Not only the company, but also third parties or creditors may be disadvantaged as a result. The court will assume that a reasonably acting director would at least have ensured that the figures were reliable.
Examples of improper management include:
- Fraud
- Use of resources for private purposes
- Irresponsible risks
- Negligence in essential insurance matters
Decisions without sufficient research
Management decisions require adequate preparation. Before making important decisions, managers must inform themselves about the relevant facts and risks. Directors have a duty to conduct careful research before making decisions. A decision made without any research can lead to serious criticism if the outcome is unfavourable. A poorly thought-out agreement with a major financial impact without market research can lead to serious criticism.
Another example concerns investment decisions where basic due diligence has been neglected. Although the court is reluctant to assess business decisions retrospectively, the manner in which a director arrives at his decision is indeed assessed. Such decisions can disadvantage not only the company, but also third parties or creditors. Ignoring clear warning signs or failing to carry out obvious research breaks through the protection normally offered by the high threshold.
Violation of Internal Rules
Violation of statutory provisions and internal guidelines can lead to liability. It is very important that order is maintained in internal rules and procedures within the company in order to prevent improper management and liability. Directors have an obligation to comply with statutory provisions and other contractual obligations. A situation in which a director ignores statutory approval requirements of the general meeting for important decisions is a striking example of this. After all, the articles of association contain the rules within which the board must operate.
Acting with a conflict of interest without disclosure to fellow directors or the shareholder also creates liability risk. Violation of internal rules can result in the company or third parties being disadvantaged, for example because they suffer damage as a result of improper management. A director who puts his own interests above those of the company makes himself vulnerable to a claim under Section 2:9 of the Dutch Civil Code. This also applies to situations where company assets are withdrawn for personal gain.
When does liability arise?
The determination of liability under Article 2:9 of the Dutch Civil Code requires careful consideration of several conditions. Not every shortcoming will lead to a successful claim. A company that wishes to hold its director liable must meet a considerable burden of proof. It must be demonstrated that the company or third parties have actually suffered damage as a result of the director’s actions or omissions. Directors have a duty to perform their duties with due care and in the interests of the company; failure to comply with these duties may lead to liability. In addition, liability requires that the legal requirements for liability have been met.
Assessment of Improper Management
The court assesses whether there has been improper performance of duties by comparing the director’s actions with what could be expected of a reasonably acting director in similar circumstances. The criterion of reasonableness plays an important role in this assessment, whereby it is examined whether the actions are seriously culpable. The concept of ‘improper management’ refers to actions or omissions that do not meet the standard of care that may be expected of a director. There is no legal presumption of improper management; the company must demonstrate that the standard has been breached.
Excessive risks without mitigating measures can lead to liability. Entrepreneurship involves risk, but the basis on which those risks are accepted must be defensible. Improper management can result in the company or third parties being disadvantaged by the actions or omissions of the director. A director who puts the entire company on the line without any risk diversification or exit strategy may be acting improperly.
Steps in liability proceedings
Liability proceedings follow a fixed system. In cases involving internal director liability under Section 2:9 of the Dutch Civil Code, the parties must take their obligations to provide evidence seriously in order to substantiate their positions:
- Determination of damage — The company must demonstrate in concrete terms that it has suffered damage and quantify this damage. This may involve situations in which the company or third parties have been harmed by the director’s actions or omissions. In practice, the amounts of damage vary from tens of thousands to millions of euros, depending on the size of the company and the nature of the allegation.
- Causal link — There must be a sufficient link between the director’s actions and the damage suffered. The burden of proof for this lies with the company.
- Serious blame — The company must substantiate that the director is seriously to blame. This is the focus of many proceedings and requires an analysis of all relevant circumstances.
- Exculpation — The director in question is given the opportunity to demonstrate that he is not personally at fault or that he has taken adequate measures. In the case of collective tasks, this possibility is limited.
Expert investigations regularly play a role, particularly in complex financial matters or when specific industry knowledge is required. Legal costs can be considerable, which sometimes prompts the parties to settle. Practical experience shows that successful claims in contested cases are rare — estimated at less than 20-30% — although receivers frequently take legal action in bankruptcy cases.
Comparison of Internal vs External Liability
| Criterion | Internal Liability (Section 2:9 of the Dutch Civil Code) | External Liability (Section 2:138/148 of the Dutch Civil Code, Section 6:162 of the Dutch Civil Code) |
| Claimant | Company (or receiver on behalf of the estate) | Creditors, third parties |
| Legal basis | Improper performance of duties + serious blame | Manifestly improper management + significant cause of bankruptcy / unlawful act |
| Damages | Damage to the company itself | Damage to creditors or third parties |
| Presumption | No legal presumption | In the event of bankruptcy: legal presumption in the event of a breach of the administration or publication obligation |
| Application | Also outside bankruptcy | Art. 2:138/148 only in the event of bankruptcy |
The distinction is relevant in practice: a company that wishes to hold its director liable for damage to itself will bring proceedings on the basis of Article 2:9 of the Dutch Civil Code. This involves damage to the company itself, whereas in the case of external liability, it is third parties or creditors who are harmed by the director’s actions or omissions. Creditors who hold the director liable for prejudice to their claim base their case on external grounds. In bankruptcy, the trustee can pursue both routes, depending on the nature of the damage.
In the case of external liability, the director often also plays a role as a debtor of the company, whereby he is responsible for meeting the obligations towards creditors. Failure to meet these obligations, such as not paying debts on time or not informing creditors correctly, can lead to personal liability on the part of the director.
Common Problems and Solutions
Practice shows recurring patterns in situations that lead to internal director liability. It is very important that procedures and internal controls are in place to prevent improper management. Directors must carefully fulfil their legal and contractual obligations. Inadequate provision of information can result in the company or third parties being disadvantaged. Recognising these pitfalls enables directors to take preventive measures.
Insufficient provision of information to fellow directors
If one director withholds relevant information from his fellow directors, all of them may be liable for any resulting damage. Withholding information may result in the company or third parties being disadvantaged, for example because they are unable to respond to risks in a timely manner or obligations are not met. Directors have an obligation to inform their fellow directors fully and in a timely manner about all relevant facts and developments. Fellow directors will find it difficult to exonerate themselves if they have not taken an active approach to gathering information.
Solution: Implement formal reporting requirements whereby each director periodically reports in writing on his or her portfolio. Carefully document board meetings and record what information was shared and when. Board regulations that contain minimum requirements for information sharing provide recourse in subsequent discussions about who knew what.
Inadequate Follow-up of Incidents
Failure to follow up adequately when problems come to light can be a serious criticism in itself. It is very important that order is maintained within the organisation so that incidents are followed up in a structured and effective manner. Directors have a duty to follow up incidents in a timely and correct manner and to fulfil their legal and contractual obligations. This applies in particular to situations in which material weaknesses in business operations are identified but not addressed.
Solution: Establish escalation procedures that determine how incidents are investigated, reported and resolved. Establish investigation obligations and monitor their implementation. Once a problem has been identified, document the measures taken to protect the legal entity against future claims.
Misleading risk communication
Incorrect or incomplete communication about risks to shareholders, supervisory directors or other stakeholders can also lead to liability. This applies in particular when risks are downplayed or concealed. Misleading communication can result in the company or third parties being disadvantaged, for example because they make wrong decisions based on incorrect information. Directors have a duty to provide accurate and complete information and to be transparent about relevant risks.
Solution: Ensure accurate risk disclosure in all relevant documents and presentations. Avoid presenting the situation in a more favourable light than is justified. If in doubt about the materiality of a risk, consult specialist legal advice. Transparency prevents subsequent accusations of deception.
Conclusion and next steps
Internal director liability under Section 2:9 of the Dutch Civil Code is based on two pillars: improper performance of duties and serious blame. It is very important that the company’s systems and procedures are in order so that risks are identified and managed in a timely manner. Directors must carefully fulfil their legal and contractual obligations. Improper management can result in the company or third parties being disadvantaged, which can result in liability for the director. The high threshold protects directors from liability for normal business decisions that turn out unfavourably, but does not offer immunity for clearly negligent or reprehensible conduct.
Collective responsibility means that fellow directors may be jointly and severally liable, even if they were not directly involved in the conduct that caused the damage. The Supreme Court has also ruled that the standard for internal liability also applies when an individual shareholder holds a director liable. Exoneration is possible but limited, especially in the case of inherently collegial tasks such as financial supervision.
Specific action points for directors:
- Ensure adequate administrative systems that generate reliable information in a timely manner
- Document decision-making and the information on which decisions are based
- Strictly comply with statutory provisions and internal approval requirements
- Implement formal reporting and escalation procedures within the board
- Consider D&O insurance as additional protection
For further insight, the topics of external directors’ liability in the event of bankruptcy (Section 2:138/248 of the Dutch Civil Code) and liability based on unlawful acts (Section 6:162 of the Dutch Civil Code) are relevant. These principles may run parallel to internal liability and each require their own analysis.
Additional sources
Relevant case law:
- Supreme Court 10 January 1997, ECLI:NL:HR:1997:ZC2243 (Staleman/Van de Ven) — fundamental judgment on the serious blame criterion; this case concerns the question of when a director can be held internally liable for improper management.
- Enterprise Chamber rulings on inquiry procedures that may form the factual basis for Article 2:9 claims
Corporate Governance Code:
- Provisions on risk management and internal control systems (best practice provisions on the duties and working methods of the management board)
- Recommendations on the provision of information between the management board and the supervisory board
Practical tools:
- Checklist of management responsibilities per meeting
- Template for management regulations with division of tasks and reporting obligations
- Procedure for recording conflicts of interest
