Director Liability: When are you personally liable for corporate debts?

Outstanding invoices, payment plans, and new assignments

Imagine: a supplier stops work because your company is not paying its invoices. To maintain the relationship and finish the project, you agree on a payment plan for the existing debts. At the same time, you ask that same supplier to carry out new work.

If your company subsequently goes bankrupt and the supplier is left empty-handed, they may decide to hold you, as a director, personally liable. It is crucial to understand that the legal test for the old invoices differs significantly from that for the new ones. A mistake in your assessment can lead to a personal financial risk.

What is the Beklamel-norm and when does it apply?

The Beklamel-norm is a well-known benchmark in corporate law, originating from a 1989 Supreme Court ruling. This norm determines that a director can be held personally liable if they enter into new obligations on behalf of the company while knowing, or having reason to know, that the company cannot fulfill them and offers no recourse.

This specifically concerns entering into NEW obligations. The core question is whether you knew at the moment of placing the new order that the creditor would suffer damage. If that is the case, you are acting unlawfully and run a high risk of personal liability.

What happened in this case at the Court of Appeal?

In the case brought before the Arnhem-Leeuwarden Court of Appeal (ECLI:NL:GHARL:2024:1467), the issue involved Puur Interieur B.V. This company had installation work performed by Velo. When the invoices remained unpaid, Velo temporarily stopped working, after which a payment plan was agreed upon.

Despite the precarious financial situation, Velo was still given the order for new work until April 18, 2018. Ultimately, neither the payment plan nor the invoices for the new work were satisfied. The supplier went to court to hold the director personally liable for the entire outstanding amount.

Why was the director liable for the NEW invoices?

The court ruled that the company's financial position was already very poor at the beginning of 2018. There was no concrete prospect of sufficient income to meet the new obligations. The director should have realized that by placing the new orders, he was causing damage to the creditor.

Because the director knew or should have understood that the company would not pay the new invoices, his actions were deemed unlawful. The court ruled that he could be blamed for this personally, making him liable for the damages resulting from the new invoices.

Why NO liability for the old payment plan?

A different norm applied to the existing debts and the agreed-upon payment plan. This is tested against the stricter Receiver/Roelofsen criterion. The court examined whether the director knew or should have understood that his actions would lead to the company not meeting its obligations.

Since the director did not yet know that the company would be unable to meet its payment obligations when entering into the original agreements, he was not held personally liable for these. There was insufficient evidence at that time to conclude that bankruptcy was inevitable.

Is selective payment allowed when you are in trouble?

Entrepreneurs in financial distress often ask whether they must pay all creditors proportionally. The short answer is no; there is generally no obligation for proportional payment. As a director, you may set priorities to keep the company's core activities running.

Selective payment does not automatically lead to personal liability, provided you have a business justification for it. In this specific case, no special circumstances were cited that made the selective payments unlawful.

What does this mean for you as a director?

• Do not enter into new obligations if you know or should understand that your company cannot pay — that is personal liability under the Beklamel-norm.
• Know that a payment plan for existing debts is NOT a new obligation; the stricter Receiver/Roelofsen-norm applies to these.
• Selective payment of creditors is generally allowed, but document why you prioritize certain suppliers.
• Always record in writing the agreements you make with creditors and the financial situation of your company.

What should you do now?

Are you unsure if you can accept new assignments while your company is in financial distress? Or do you want to know if a payment plan is a wise way to protect yourself from claims? Early legal advice is the best way to prevent becoming personally liable for your company's debts.

Ruling

This blog post is based on ECLI:NL:GHARL:2024:1467.