Legal Blog

Wednesday, March 26, 2014

Directors’ liability

Generally, in Curaçao (as well as in Aruba, St. Maarten and the BES islands) liability may arise in the event a managing director is found to be seriously negligent (‘hem een ernstig verwijt kan worden gemaakt’) in fulfilling his tasks as member of the management board of a legal entity (NV, BV, foundation or association).

Section 2:8 subsection 3 of the Curaçao Civil Code ('CCC') provides that in performing its duties the management board is focused on the interest of the legal entity and its associated business operations, insofar as they exist. This provision is also relevant to the question of whether and to what extent a trust director can act on the basis of instructions from the principal. What is considered in this posting, more or less, also applies to the law of Aruba, St. Maarten and the BES islands.

Section 2:14 subsection 1 CCC provides that every director is obliged towards the legal entity to perform the duties properly within the sphere of his activities. If there is only one director, the sphere of his activities covers all the duties.

Section 2:15 subsection 1 CCC provides that the management board is obliged to keep accounts of the financial position of the legal entity and of everything with regard to the activities of the legal entity, according to the requirements arising from these activities, in such a way and to retain the books, records and other information carriers related to this administration in such a way that at all times the rights and obligations of the legal entity can be ascertained. The obligation to keep accounts of a legal entity therefore rests on the management board. In addition to this in subsection 2, notwithstanding the provisions elsewhere in law, the management board is obliged every year within eight months after the end of the financial year to prepare and put on paper annual accounts, at least consisting of a balance sheet and a statement of income and expenses. 

In the event of bankruptcy the liability of directors is provided for in Section 2:16 CCC. Subsection 1 provides that in the event of the bankruptcy of the legal entity each director is jointly and severally liable to the estate for the deficit being the amount of the debts insofar as they cannot be settled by liquidation of the other assets if (i) apparent improper management had been involved and (ii) it is plausible that this is a major cause of the bankruptcy. The application of this provision only takes into account the improper management in the three-year period prior to the bankruptcy or if it was preceded by a moratorium (subsection 3) within the sense of Section 238 of the Bankruptcy Decree 1931, the three-year period prior to the moratorium.

Subsequently subsection 2 provides that if the obligations of Section 2:15 CCC (the obligation to keep accounts) have not been complied with or the annual accounts have not been drawn up within due time, it is presumed that improper management was apparently also involved with regard to the rest and that this improper management was a major cause of the bankruptcy. Minor negligence is not taken into account. In this connection it must be noted that minor negligence is not often the case. If the obligation to keep accounts has been violated, it is suspected that the management board performed its duties improperly for the rest as well. However, this is a refutable presumption.

Section 2:16 subsection 3 CCC provides that the director is not liable if he proves (i) that the improper management which was a major cause of the bankruptcy, partly considering his sphere of activities and the period during which he was in office, cannot be attributed to him and (ii) he has not been negligent in taking measures to avoid the consequences of it. The part 'partly considering his sphere of activities' is irrelevant in a case in which the legal entity has only one director. It has been provided in subsection 5 that the court can mitigate the amount to which the directors or certain directors are liable if it appears excessive to the court, considering the nature and seriousness of the improper management, the other causes of the bankruptcy as well as the way in which it has been settled.

Subsection 9 provides that for the purposes of Section 2:16 CCC, a person is equivalent to a director if, during any period (within the three-year period meant in subsection 3), he determined or co-determined the policy of the legal entity as if he was a director, or if the founder apparently acted negligently. Then subsection 10 provides that subsections 1 to 9 of Section 2:16 CCC apply to public and private limited companies but for the rest only to a legal entity which owned a business within the sense of the Trade Register Decree within the period (of three years) referred to in subsection 3, whereby only improper management during that period is taken into account.

Section 2:16 CCC does not affect the authority of the trustee in bankruptcy to bring an action based on an agreement with the director or pursuant to Section 2:14 CCC (subsection 12). In the first case the claim is based on a breach of contract and in the second case on a wrongful act.

The liability of a legal entity as a director of another legal entity also rests jointly and severally on any person who was its director at the time that the legal entity's liability arose (Section 2:17 subsection 1 CCC). The same exculpation opportunities as described above for the 'direct' director (subsection 2) will apply to this 'director of the corporate director'.

The purpose of a private foundation (Stichting Particulier Fonds: 'SPF') should not be to carry on a business (Section 2:50 subsection 5 CCC). Therefore it will not often occur that a business is attached to an SPF. Business not considered as such includes: a. being active in investing its capital regardless of the nature of these investments; b. holding a participating interest in another legal entity, and c. participating in a limited partnership as a limited partner (Section 2:50 subsection 6 CCC).

To reduce the risk of liability it is of importance to ensure that your business is compliant with applicable legislative and regulatory requirements.

Filed under: Corporate by Karel Frielink.



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