The directors’ liability regime has not escaped the recent reform of company law, quite the opposite.
As a reminder, under the old regime, directors were liable for their wrongful acts against the company and third parties without limitation.
As we will see, the new Code of Companies and Associations (“CCA“) is fundamentally transforming the system at the risk of making it more complex and less accessible.
Among the essential innovations, we can mention in particular the introduction of a principle of limiting the financial liability of directors (by means of ceilings), the extension of the joint and several liability to mismanagement and the codification of marginal control.
Before turning to the most important amendment (i.e. the cap) in more detail, it’s appropriate to mention some of the adaptations that the CCA makes to the general liability regime, attempting, with varying degrees of success, to modernise this legislation through clear and consistent legal rules.
Henceforth, the general regime – which was divided between Articles 527 and 528 of the former Companies Code – is regulated in a single text (Article 2:56 of the CCA), which applies to all legal persons covered by the CCA (non-profit associations and foundations included).
Extension to de facto directors
In addition to the members of the management body and daily managers, the general regime also applies to de facto directors – i.e. those “who hold or have held the power to effectively manage the legal person” – whose liability is therefore no longer limited to certain cases in the context of companies in difficulty.
Marginal control by the judge
From now on, in order for the judge to be able to rule on the wrongful (or not) nature of the decision, act or conduct attributable to the director, he will have to assess whether that decision, act or conduct manifestly exceeds the margin within which normally prudent and diligent directors, placed under the same conditions, can reasonably have a deviating opinion.
Consequently, if he wishes to be able to exercise his discretion, it will be up to the judge to determine in advance which decisions, acts and conduct clearly exceed those that normally prudent and diligent directors would have taken in the same circumstances.
It should also be noted that the CCA only refers to decisions, acts and conduct of which the harmful character is determined. So what will happen if a director is omitted, negligent or inactive? Will the marginal control provided for by the CCA also apply?
What will happen if a director is omitted, negligent or inactive? Will the marginal control provided for by the CCA also apply?
Extension of liability
Another important innovation of the CCA is the extension of the joint and several liability. This now applies to all mismanagement (i.e. faults committed in the exercise of their assignment) whereas, under the old regime, it only applied to mismanagement that was common or in solidum in the event of concurring acts.
Duty to report
Under the old regime, the director who wanted to avoid liability had to demonstrate that he was not at fault and denounce the infringement at the first general meeting.
The CCA only maintains the obligation of reporting, which must now be made to the Board of Directors and no longer to the General Assembly. It is therefore no longer necessary to demonstrate the absence of fault or causal relation to escape liability.
The text of the CCA leaves some questions open that will inevitably be the subject of many discussions: within what time frame should the offence be reported to the board? Does this mean that the notification can take place when the contested and reported decision has already been implemented for a long time? How should the board react in the event of a notification?
Limitation of liability (caps) – Nature of public order
The main amendment proposed by the CCA regarding directors’ liability is undoubtedly the introduction of limits on their financial liability towards the legal person and third parties.
There are five such limits, ranging from EUR 125,000 for the smallest companies to EUR 12,000,000 for the largest. They are determined based on average revenue over the last three financial years and the average balance sheet total over the same period.
This legal limitation is therefore only of interest in situations where the director’s fault will cause damage in excess of the ceiling. It is therefore de facto possible that the victim of a fault committed by a director may not be fully compensated for the damage suffered if it exceeds the amount of the ceiling concerned. In addition, what will happen if the cap is exhausted and there are other victims?
In order to temper this principle, the CCA provides that limitation of liability is excluded in the following cases:
- in the event of repeated minor faults, gross negligence, fraudulent intent or intent to cause harm to the person responsible;
- in the event of application of the guarantee obligations imposed by Articles 5:138 and 7:205 of the CCA (invalid payment of shares);
- in the event of joint and several liability as referred to in Articles 442quater (withholding tax) and 458 (conviction for tax fraud) of the CIR 92, Articles 73sexies (criminal convictions) and 93undeciesC (VAT) of the VAT Code, and Article XX.226 of the CEL (NSSO).
In these cases, the liability of the directors at the origin of the fault or jointly and severally liable shall be unlimited.
It must be noted that the exclusion of gross negligence and minor negligence of a usual nature substantially reduces the effects of the cap on liability which is supposed to be the core of this part of the reform. Directors therefore seem more likely to be held liable unlimited since it will be easier to prove (at least for gross negligence or repeated slight negligence).
In addition, if the director has insurance coverage, what will be the insurer’s reaction in the event of repeated slight negligence for which the director is liable for an amount below the ceiling set by the CCA? Will he agree to cover any compensation to be paid? This situation will certainly generate important discussions between directors and insurers.
Finally, as these ceilings are of public order, there can be no derogation from them. Consequently, the company will not be able to implement a more flexible limitation than that provided for by the CCA.
What will be the insurer's reaction in the event of repeated slight negligence for which the director is liable for an amount below the ceiling set by the CCA? Will he agree to cover any compensation to be paid?
As we have seen, the directors’ liability regime has been subject to significant changes that, on paper, are perplexing as to their true effectiveness/necessity compared to the old regime.
Indeed, the lack of precision of the new regime on certain points and the complexity of its reading illustrate the difficult search for a balance between management that supports the development of the company and the accountability of the director’s function. It must therefore be noted that this alignment is still far from being achieved given the very limited scope that ultimately characterizes the limitation of directors’ liability and the large number of questions it leaves open.
We are therefore wondering about the real need for these changes compared to what the previous system provided for. Does the CCA text really transpose the will of the legislator? These are all questions that practice will attempt to answer, mainly through the marginal control that the CCA imposes on the judge, who will therefore be responsible for setting the guidelines for the new regime.
Deminor will guide you through each step of your transition to the new regime.
Please contact Thibaut Claes for further information.