[No. 91] Director Liability and Disculpation Defences - Muddy Waters

1. Pursuant to section 2:9 DCC, every director is expected to perform his/her task properly vis-a-vis the legal entity (like corporations). The second sentence of section 2:9 DCC provides that if a matter falls within the job parameters of two or more directors, every director is liable for the full amount in case of malperformance, unless the director cannot be blamed for the malperformance and he/she was not negligent in taking measures to avoid the consequences of the malperformance. In Dutch:

Een bestuurder is tegenover de rechtspersoon gehouden tot een behoorlijke vervulling van de hem opgedragen taak. Indien het een aangelegenheid betreft die tot de werkkring van twee of meer bestuurders behoort, is ieder van hen voor het geheel aansprakelijk terzake van een tekortkoming, tenzij deze niet aan hem is te wijten en hij niet nalatig is geweest in het treffen van maatregelen om de gevolgen daarvan af te wenden.

This notion of collective director liability - unless there is a ground for individual disculpation, which requires a director-by-director approach as to the director(s) who present(s) a disculpation defence - is based on the notion of collective board responsibility. Directors are in it together.

2. The Supreme Court has clarified that in order to be personally liable, a director must have made a serious mistake (ernstig verwijt). The Supreme Court has never really made clear what the anatomy of such a serious mistake in the section 2:9 DCC setting is. What it has made clear, since 1997, is:

• that such a serious mistake should be distinguished from conscious recklessness and intentional misconduct;
• that the circumstance that the director has violated a provision in the legal entity's articles of association that aims to protect the legal entity - like the provision mandating prior approval by supervisory directors for certain transactions - in principle results in liability (i.e., there is a presumption of a serious mistake), although the director does have the possibility to show that on balance that violation does not qualify as a serious mistake; and
• that the circumstances that could play a role in the personal liability analysis include:
  • the nature of the activities undertaken by the legal entity;
  • the risks generally involved with those activities;
  • a division of tasks within the board (if any);
  • guidelines the board has to take into account (if any);
  • information the director had or should have had at the time of the decision or act that is under attack; and
  • the knowledge and care that can be expected of a director that is up to his/her task and fulfills his/her task in a diligent manner.

I explained the essence of this case law, e.g., here, here and here.

3. There seems to be consensus in literature that if - in case of a board consisting of two or more directors - one director has made a serious mistake, all directors are liable for the full amount (jointly and severally) unless they are able to show grounds justifying they should not be (i.e., they can disculpate themselves). In this approach, the "if a matter falls within the job parameters of two or more directors" wording becomes part of the general disculpation analysis. However this may be, it is still unsettled in case law - due to lack of Supreme Court precedent - how the second sentence of section 2:9 DCC should be applied. The water is still muddy. Some clarity was provided more recently by the Ministry of Justice, when it presented its legislative proposal to introduce an optional one-tier board structure in Dutch case law (Dutch law traditionally applies the two-tier system, see, e.g., here), that also aims to modify section 2:9 DCC somewhat in light of this development. The proposal includes:

• adding to the new section 2:9 DCC the liability threshold introduced in case law (i.e., serious mistake); and
• that in case of a multiple-person board, an element in the disculpation analysis is the divison of tasks (if any).

But in the end, progress is typically made not by legislation but by application of the statutory framework in case law.

4. And there is something to report here. In a recent section 2:9 DCC case, the Leeuwarden Court of Appeal basically had to decide whether the disculpation defence advanced by one of the two directors made sense (I'm leaving some details aside here). Several board decisions were made in violation of the corporation's articles of association, meaning the applicablity of Supreme Court case law explaining that in such a scenario there is a presumption of a serious mistake and that it's up to the director(s) to rebut the presumption in order to avoid liability (leaving aside issues of damage and proximate causation). The Court of Appeal ruled in s. 9-10 that the director who appealed the ruling in first instance - in which both directors were held liable - failed to rebut the presumption, so that unless the director can disculpate himself, liability follows. The focus of the court then shifted to the second sentence of section 2:9 DCC. The disculpation defence of the director, as presented to the Court of Appeal (according to its judgment) was in essence that the other guy, and not him, had usurped all the power and made all the decisions, without him knowing what went on as to decisionmaking (he only stuck to operational activities relating to a different corporation). In short: the 'how was I supposed to know?' defence, implying the matter at hand did not fall within his job parameters. In Dutch:

11. [appellant] voert (met de grieven I,II en III) ter disculpatie aan dat Brander zich solitair met het bestuur van de vennootschappen bezig hield en dat hij ([appellant]) in het geheel niet in de besluitvorming werd betrokken en ook niet wist welke besluiten Brander nam. [appellant] hield zich bezig met het operationele aannemingswerk bij Aannemingsmaatschappij [persoonsnaam]; daarvoor was hij de verantwoordelijke man. Er was een duidelijke taakverdeling. Alle door Aquaverium [de vennootschap, BFA] aan de orde gestelde kwesties hebben zich geheel buiten het gezichtsveld van [appellant] voltrokken, aldus [appellant]. Bovendien stelt [appellant] dat, door de verschillende vennootschappen waarbij Brander betrokken was, het voor hem moeilijk te bepalen zou zijn geweest in het kader van welke vennootschap Brander de betreffende activiteiten verrichtte, zodat hij ook daardoor geen enkel wetenschap kon hebben van de door Aquaverium gestelde kwesties.

The court isn't merciful and dismisses this defence in s. 12, based on two grounds. These grounds follow from the fact, as established by the court, that the decisionmaking situation explained above did not rest on a division of tasks that was explicitly made by the directors, but was the result of a course of events taking place throughout the years as a result of which only the other director was actually performing his task as director of the corporation, while it was neither presented nor shown that the director before the court took any relevant action intended to perform his task as a director of the corporation. 

1. The director before the court thus failed to show that the matter at hand did not fall within his job parameters, basically already killing his disculpation defence; and

2. the fact that this director left the management of the corporation fully to the other director, while he himself (mainly) worked for another corporation, and without (i) having become clear that he even engaged in the smallest degree of control or influencing of  the conduct of the other director and (ii) another disculpation ground being presented to the court, is insufficient to find that as to the violation of the corporation's articles of association he did not make a serious mistake and that he was not seriously negligent in taking measures tot avoid the consequences of the malperformance.

In Dutch:

12.1. Nu [appellant] aan zijn stelling dat de onderhavige besluiten niet tot zijn takenpakket behoorden, ten grondslag legt dat Brander de bestuurstaken volledig naar zich toetrok, zónder hem ([appellant]) bij de besluitvorming te betrekken en zonder hem op de hoogte te tellen van de genomen besluiten, is daarmee naar het oordeel van het hof geen sprake van een op daartoe strekkende afspraken berustende interne verdeling van de bestuurstaken, maar van een feitelijk gegroeide situatie waarin de bestuurstaken enkel door Brander werden uitgeoefend. Gesteld noch gebleken is dat [appellant] enige relevante actie heeft ondernomen die ertoe strekte dat hij zijn verantwoordelijkheden als bestuurder kon (blijven) uitoefenen.
12.2. Daarmee heeft [appellant] naar het oordeel van het hof in de eerste plaats niet, althans niet voldoende onderbouwd betwist dat de onderhavige aangelegenheden behoorden tot zijn werkkring als bedoeld in art. 2:9, tweede zin BW, zodat hij krachtens deze bepaling jo. art. 2:11 BW in beginsel voor het geheel aansprakelijk is ter zake van de betreffende tekortkomingen.
12.3. In de tweede plaats is het hof van oordeel dat het feit dat [appellant] het bestuur van de vennootschap geheel overliet aan Brander en zelf (hoofdzakelijk) werkte voor een andere vennootschap (Aannemingsmaatschappij [persoonsnaam], zie punt 3.2 van de memorie van grieven), zonder dat gesteld of gebleken is dat hij op het handelen van Brander ook maar enige controle of invloed uitoefende, en zonder dat ook verder enige disculperende grond aan het hof is gepresenteerd, onvoldoende is voor het oordeel dat hem ter zake van de onderhavige overtredingen van de statuten geen ernstig verwijt kan worden gemaakt en dat hij niet in ernstige mate nalatig is geweest in het treffen van maatregelen om de gevolgen daarvan af te wenden.
12.4. Het hof sluit zich dan ook aan bij het oordeel van de rechtbank dat het beroep van [appellant] op disculpatie niet opgaat.

So the court dismissed the defence on all possible grounds.

5. Some initial views. I see the rationale of the second ground: it's difficult to justify disculpation under the regime of section 2:9 DCC if the director did not participate in the management of the corporation whatsoever - as the court ruled here - in view of the notion of collective board responsibility (implying that individual directors should not be excluded from the management and should inform themselves on a basic level what other directors are up to), even leaving aside the fact that the director failed to take any damage controlling measure. The first ground seems to assume that there was no division of tasks in the first place, only an abandonment of duty by one director. Based on the facts as presented by the court, that is not without merit. The court, however, does refer to a division of tasks based on an arrangement made by the directors to that effect. If the court is suggesting here that a division of tasks can only be based on such an explicit arrangement, I would find that troubling; granted, it's unclear whether the court is suggesting this, as the contradiction here - as I'm reading it - is not so much one between an explicit and an implicit arrangement as it is one between an arrangement and no arrangement at all, but  still. I am not inclined to rule out the possibility altogether that a division of tasks can be the result of 'the way things evolved over time'. The pivotal question in this respect is whether there is a division of tasks adhered to by the directors, less how that division came into place exactly.

6. In any event: a welcome application in case law of the section 2:9 DCC framework, that may even reach the Supreme Court and help to 'unmuddy' these waters. Who knows? The Defining Tension is patient...