Your liability as a director of a company. How does it work?

Directors' liability under the company law

Directors' liability is divided into two categories in the Companies and Associations Code (abbreviated “CCA”):

• As a director, you are liable to the company for errors committed in the performance of your management duties.
• As a director, you are liable to third parties for errors committed in the performance of your duties to the extent that the error is also an extra-contractual error.

Directors' liability in both cases is limited to those decisions, acts or behaviours that are manifestly outside the range within which normally prudent and careful directors, placed in the same circumstances, could reasonably disagree. 

In other words, there must be clear error that a prudent director would not make. In this sense, a policy decision that later turned out to be less profitable than expected is not an error and therefore cannot lead to the director's liability. In this way, the legislator rightly takes into account that directors often have to make decisions in uncertain economic circumstances.

The court will therefore ‘marginally test’ your conduct: only if you have behaved outside the boundaries of how a normally prudent director would behave can you be held liable.

There is one exception to this marginal test. If, as a director, you commit a breach of the provisions of the CCA or the company's articles of association, you will be jointly and severally liable as a director for all damages towards the company and/or third parties.

Finally, the director's liability is also nominally limited, except in the case of a slight ordinary misconduct, a serious misconduct or if there is a fraudulent intent or intent to harm. This nominal limitation depends on the size of your company. For example, for the smallest companies (average turnover less than EUR 350,000.00 and average balance sheet total less than EUR 175,000.00), there is a limitation of EUR 125,000.00. 

As a director, can you be held liable by your company?

So, in theory, the company can hold you liable as a director for serious errors committed in the performance of your duties. The company can always hold you liable if you violate the CCA or the articles of association.

It is the general meeting of shareholders that can invoke this liability on behalf of the company. An individual shareholder can also file such a liability claim against a director. To do so, the shareholder concerned must hold at least 10% of the shares.

As a director, can you be held liable by a supplier or customer of the company?

A contracting party of the company used to be able to hold you liable as a director only in exceptional cases if you made a mistake on behalf of the company that caused it to suffer damage. 

This was only possible if there was an extra-contractual fault (e.g. a crime) as a result of which the third party had suffered damage that was different from the damage caused by the company. Thus, if the damage suffered by the third party was caused by the wrongful performance of the agreement with the company (e.g. poor execution of an order), then this third party (e.g. the customer) could not directly hold the director liable.

How can you protect yourself from this increased liability?

You are probably now asking yourself the question: as a director, how can I protect myself against such third-party claims?

The company can contractually exclude the extra-contractual liability of its director(s), except in the case of intent to harm or if the damage is a result of a breach of physical or psychological integrity.

It is therefore advisable for your company to explicitly state in all agreements it enters into, i.e. with customers, suppliers, etc., that its contractual counterparty (the customer, the supplier, etc.) cannot directly hold the director or other employees of the company liable. It is also best to add such provision in your company's general terms and conditions.

It is also important to know that your company cannot legally indemnify (= cover) its director(s) in advance for future mistakes. So unfortunately, you cannot make a prior agreement that the company protects its directors in this sense.

Best to get insurance too

Finally, it is advisable to have your insurance policy reviewed as a director in light of this additional risk. After all, as a director, you can take out D&O insurance through the company, which covers your directors' liability.