Prevention is better than cure – drivers best take action now
The COVID-19 virus outbreak and the protective measures issued by the government have a particular impact on your business, including financially. Consequently, it is crucial that every director can take the necessary measures in time to avoid directors’ liability.
1. Continuity
When weighty and concordant facts may threaten the continuity of the business, the governing body should deliberate on the measures to be taken to preserve the continuity of economic activity for a minimum period of 12 months.
The COVID-19 crisis and its impact on the national and international markets undoubtedly constitute circumstances that could threaten the continuity of the business. The board of directors of each company should thus meet as soon as possible to deliberate on the measures to be taken in the context of this crisis.
Directors who fail to follow this procedure risk directors’ liability.
2. Alarm procedure – benefits
Public limited companies must also follow a specific procedure if the company’s net assets have fallen to less than half of its capital.
A similar procedure should be followed in a private limited company (BV) or cooperative society (CV) when (i) the company’s net assets are likely to become or have become negative or (ii) the governing body determines that it is no longer certain, according to reasonably foreseeable developments, that the company will be able to meet its debts for at least the next 12 months (the liquidity test).
In this context, the distribution policy regarding dividends and directors’ fees of the company should also be treated with caution. If certain distributions are made without meeting the liquidity test, the directors’ liability is again at risk.
In case the alarm bell procedure is not followed, the damage suffered by third parties shall, subject to proof to the contrary, be deemed to result from the failure to follow the alarm bell procedure. This again increases the risk for the company as well as its directors, who may be held liable as a result.
3. Mismanagement
In case the company’s financial situation persistently deteriorates, there is a risk that it may become the subject of a procedure of judicial reorganisation or even bankruptcy. In cases of maladministration (i.e. the unlawful continuation of an apparently irretrievably lost company while having knowledge or ought to have had knowledge of this company’s condition and not behaving as a normal, prudent and diligent director), in the period preceding the bankruptcy, the directors can be held personally and jointly and severally liable for (part of) the company’s debts to the extent of the deficit in the bankruptcy estate.
4. Decision
To avoid directors’ liability, directors should take action today and follow the necessary procedures. Although some would wrongly assume that pursuing anticipatory legal proceedings would not be the priority in this crisis situation, it is crucial to take the necessary measures, not only for the continuity of the company itself, but also to avoid (criminal) sanctions on the part of the directors.
If you have any questions regarding the scope of these obligations or their practical application during this period of social distancing, you can always contact your permanent contact at Quorum or by sending an e-mail to info@quorumlaw.eu.
