Is the director of a liquidated Dutch limited company liable for shareholders’ losses?

When a company is liquidated, creditors are frequently left with compensation claims. Shareholders, too, suffer losses as a result of liquidation. Examples include the depreciation of share The portion of registered capital of a private or public limited company
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and investments that can no longer be recovered. This is, in principle, part of the risk they take as entrepreneurs. In a recent case in the Netherlands however, the shareholder of a liquidated company sued its director. In the Netherlands, is a director liable for losses incurred by a shareholder? Dutch corporate lawyer Hidde Reitsma explains.

Shareholders’ losses in the Netherlands

Shareholder’s losses are the financial losses incurred by a shareholder due to the decrease in  value of his shares. In the Netherlands, the shareholder can, subject to certain conditions, recover those losses from a third party. A third party is considered liable for shareholders’ losses if he has acted in violation of a specific due diligence standard towards the shareholder(s). This also applies if the third party is a director of the company.

Liability criteria for shareholders’ losses in the Netherlands

Case law has established criteria for determining whether a director is liable for shareholders’ losses. Firstly, the director must have violated a specific due diligence standard in respect of the shareholder. If the director has not complied with statutory provisions designed to protect an individual shareholder, for example. Secondly, it must be possible to attribute serious blame to the director for the violation in question.

Dutch court examines violation of due diligence standard

In a recent case, a shareholder had sued the director of a liquidated company for damages on account of unlawful conduct towards the shareholder. A Dutch court will apply the doctrine of shareholders’ losses and first ascertain whether a due diligence standard existed between the director and the shareholder. The court assesses whether this is the case.

Shareholders’ interest

The management agreement between a director and his company stipulates that the director must perform his duties carefully, diligently, faithfully and to the best of his ability in a way that is conducive to the interests of the company and its shareholders. This constitutes a specific due diligence standard, seeing that the law (Section 2:239, Subsection 5 of the Dutch Civil Code) prescribes that a director must be guided by the interests of the company and its affiliated enterprises in the performance of his duties. The law states nothing about the interests of the shareholders. On this point, the management agreement therefore contains a deviation from which a due diligence standard towards the shareholders ensues.

No serious blame director

From the facts, the court found that the director had not always acted in a way that was conducive to the interests of the shareholder. As such, he had violated the due diligence standard. However, no serious blame could be attributed to the director for the violation. Circumstances that could not be attributed to the director, such as liquidity problems, production problems and the loss of an important supplier, played a major role in the company’s demise.

Shareholder obstructed business operations

Moreover, the shareholder himself had directly and indirectly played a large role in causing the problems, seeing that he himself (through another private company) was the company’s main supplier and supplied inferior products. The shareholder subsequently prevented the director from buying the products from another supplier. The shareholder’s actions also lost the company the license it needed.

Shareholder negligent towards the director

In short, the shareholder personally made life very difficult for the director. The parties were both to blame for the liquidation, but the initiative lay with the shareholder. The court even went so far as to state that it was the shareholder who had behaved negligently towards the director. The claims of the shareholder were therefore rejected.