The outbreak of the COVID-19 virus and the protective measures issued by the government have a particular impact on your company, e.g. at a financial level. It is therefore crucial that every director can take the necessary measures in a timely manner to avoid directors’ liability.
When serious and congruent facts may jeopardize the continuity of the enterprise, the board of directors should deliberate on the measures required to safeguard the continuity of economic activity for a minimum period of 12 months.
The COVID-19 crisis and its impact on national and international markets are undoubtedly circumstances that could potentially jeopardize the continuity of the company. The board of directors of each company should therefore schedule a meeting as soon as possible to discuss the measures to be taken in the context of this crisis.
Directors who fail to follow this procedure risk directors’ liability.
2. Alarm bell procedure – benefits
Public limited companies must also follow a specific procedure if the net assets of the company have dropped to less than half of the capital.
A similar procedure should be followed in a private limited company (BV) or the cooperative company (CV) when (i) the net assets of the company threaten to become or have become negative or (ii) the board of directors determines that, according to reasonably foreseeable developments, the company will be most likely not be able to pay its debts for at least the following 12 months (the liquidity test).
In the aforementioned context, consideration should also be given to reviewing the policy of distribution of dividends and bonuses. If the liquidity test was not carried out prior to a certain distribution, the directors’ liability is once again jeopardized.
In the event that these procedures are not complied with, the damage suffered by third parties shall be considered to stem from the absence of the alarm bell procedure, barring proof to the contrary. This in turn increases the risk for the company and its directors, who may be held liable.
In the event that the company’s financial situation continues to deteriorate, there is a risk that it will be subject to judicial reorganization or even bankruptcy proceedings. In the event of mismanagement (i.e. the unlawful continuation of company that is irretrievably beyond redemption while the director does or should have knowledge of this fact and the director does not act with due diligence, care and caution) during the period prior to bankruptcy, the directors are held personally, jointly and severally liable for (part of) the debts of the company, up to the amount of the deficit resulting of the bankruptcy assets.
To avoid directors’ liability, directors should presently take action and follow the necessary procedures. Although some would mistakenly assume that following anticipatory legal procedures would not be a priority in the current crisis, it is crucial to take the necessary measures, not only for the continuity of the company itself, but also to avoid (penal) sanctions against 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 regular contact at Quorum or by sending an email to email@example.com.