Director liability in bankruptcy in Belgium: when does it become personal?

The company is bankrupt, but does that protect its director? Not always. Trustees in bankruptcy (curator / curateur) systematically investigate whether management errors contributed to the bankruptcy, and director liability in bankruptcy is increasingly invoked in Belgium, including by the tax authorities and the National Social Security Office (RSZ / ONSS). If you know the risks, you can limit them, and if you are pursued, you often have solid defences.

Director liability in bankruptcy: the starting point

A company with legal personality has its own assets. In a company whose shareholders are liable only up to their contribution, such as a private limited company (BV / SRL), a public limited company (NV / SA) or a cooperative company (CV / SC), its debts are in principle not the debts of its directors or shareholders. In a general partnership (VOF / SNC) or a limited partnership (CommV / SComm), however, the (general) partners are liable without limit for the debts.

Nor does the company’s bankruptcy automatically make the director bankrupt. This protection is not absolute, however: the law provides for several situations in which a director can be held personally liable.

Manifestly serious fault

If a manifestly serious fault (kennelijk grove fout / faute grave et caractérisée) committed by a director contributed to the bankruptcy, the director can be ordered personally to pay all or part of the company’s debts, up to the amount of the shortfall (Article XX.225 of the Code of Economic Law). This also applies to former directors and to anyone who ran the company in fact. The claim can be brought by the trustee and, under certain conditions, by creditors who have suffered loss. The fault need not be the sole cause of the bankruptcy, but it must have contributed to it.

A manifestly serious fault is more than an ordinary management error. It is a fault that a normally prudent and diligent director would not commit in the same circumstances and that any reasonable person would unmistakably recognise as a fault. Any form of serious tax fraud, whether organised or not, is deemed by the law itself to be a manifestly serious fault. The courts have also found such a fault in cases including:

• continuing a hopeless business for years;
• fictitious or missing accounts;
• removing assets shortly before the bankruptcy;
• a structural failure to pay over tax and social security withholdings.

Economic misfortune, a wrong commercial assessment or the loss of a major customer are not in themselves a manifestly serious fault. That distinction is often at the heart of the defence.

Wrongful trading: continuing a loss-making business

A director can also be personally liable if, at a time when they knew or should have known that there was manifestly no longer any reasonable prospect of saving the company or its activities and avoiding bankruptcy, they did not act as a normally prudent and diligent director would have done in the same circumstances (Article XX.227 of the Code of Economic Law). Anyone who simply continues the loss-making business at that point and lets debts pile up is therefore taking a risk.

Timely measures, such as a judicial reorganisation or a timely filing for bankruptcy, are the best protection. The law also requires a company that has ceased its payments to file for bankruptcy within one month.

Tax and social security debts

• Payroll withholding tax and VAT: directors can be held jointly and severally liable for unpaid payroll withholding tax (bedrijfsvoorheffing / précompte professionnel) and VAT (Article 442quater of the Income Tax Code 1992 and Article 93undecies C of the VAT Code). In the event of repeated non-payment, fault is in principle presumed; the director can rebut that presumption. The presumption does not apply where the non-payment results from financial difficulties that led to a judicial reorganisation, a bankruptcy or a judicial dissolution, and the tax authorities must then prove the fault. Read more in our article on VAT debts and director liability.
• Social security contributions: in the event of bankruptcy, directors can, among other things, be held jointly and severally liable for social security contributions if, in the five years before the declaration of bankruptcy, they were involved in at least two bankruptcies or liquidations of enterprises that left social security debts unpaid (Article XX.226 of the Code of Economic Law).

Other grounds

The trustee can also, on behalf of the company, pursue a director for ordinary management errors. A director is only liable for such errors if the decision fell manifestly outside the range within which normally prudent and diligent directors in the same circumstances could reasonably differ in opinion (Article 2:56 of the Belgian Companies and Associations Code, WVV / CSA). Directors can also be liable, including towards third parties, for breaches of the Code or of the articles of association.

Founders can be liable too: if a private limited company goes bankrupt within three years of acquiring legal personality and its initial equity was manifestly insufficient for the normal conduct of the planned activity for at least two years, they can, under certain conditions, be held personally liable (Article 5:16 WVV). The financial plan plays a central role here, as we explain in our step-by-step guide to setting up a BV. A personal guarantee given for a company loan also allows the bank to recover from the director outside the bankruptcy.

Who brings the claim?

Claims based on a manifestly serious fault are usually brought by the trustee, and a wrongful trading claim can only be brought by the trustee, in the interest of all creditors: whatever the trustee recovers goes into the bankruptcy estate and is distributed among the creditors. As a rule, such a claim comes before the enterprise court (ondernemingsrechtbank / tribunal de l’entreprise) that declared the bankruptcy. A creditor who suffers personal loss as a result of a director’s fault can, under certain conditions, also take action directly.

Such proceedings often require a thorough examination of the accounts, sometimes with the help of a court-appointed expert, and can take a long time. An early and well-documented response to the trustee’s first questions is therefore important.

Prevention: what can you do as a director?

The best defence starts before the bankruptcy. A few concrete steps:

• Monitor the figures. If the net assets of a BV are negative or threaten to become negative, or if it is no longer certain that it will be able to pay its debts as they fall due for at least twelve months, the general meeting must be held no later than two months after that situation was or should have been established, to decide on dissolution or on recovery measures (the alarm bell procedure, Article 5:153 WVV). For an NV, a comparable rule applies as soon as the net assets fall, as a result of losses, below half of the share capital (Article 7:228 WVV). Failing to act creates liability: the damage suffered by third parties is then presumed, unless proven otherwise, to result from that failure.
• Record your decisions. Minutes of board meetings, advice from your accountant and cash-flow forecasts will later show that you acted with due care.
• Pay payroll withholding tax and VAT on time, or apply for a payment plan in good time. Repeated non-payment quickly leads to personal liability.
• Seek advice in good time on a reorganisation or a bankruptcy filing, and check whether directors’ liability insurance covers you. If you are invited to appear before the Chamber for Enterprises in Difficulty, take the invitation seriously.

How do we defend directors?

We reconstruct the timeline with figures: when did the situation become irreversible, what measures did you take, such as cost savings, an additional contribution or your accountant’s advice, and why were your decisions defensible at that time? Liability is assessed at the time of the decision, not with today’s knowledge. Where necessary, we also contest the causal link between the fault and the shortfall, as well as the amount claimed. When the tax authorities bring a claim, we also check whether the presumption of fault actually applies.

Frequently asked questions

I was only a director on paper. Does that protect me?

No. A passive director can also be pursued: anyone who does nothing when they should have acted may thereby commit a fault themselves. Anyone who ran the company in fact without being formally appointed can also be liable.

Do I have to cooperate with the trustee?

Yes. As a director of a bankrupt company, you must remain available to the trustee and provide the information and documents requested. Read also what happens once a business has been declared bankrupt.

Is my liability as a director capped?

Sometimes. The WVV limits directors’ liability to a maximum amount that depends on the size of the company (Article 2:57 WVV). That cap does not apply to serious faults, minor faults that are habitual rather than accidental, fraudulent intent or intent to cause harm, nor to unpaid payroll withholding tax, VAT and social security contributions (Article XX.226 of the Code of Economic Law). A manifestly serious fault is therefore not covered.

Is there a limitation period for claims against a director?

Yes. Claims against directors for acts related to their mandate are, as a rule, time-barred five years after those acts or, if the acts were deliberately concealed, five years after their discovery (Article 2:143 WVV). The starting point may depend on the legal basis of the claim, and different rules may apply to the tax authorities. We always examine limitation as a first line of defence.

Novex Advocaten can help

We defend directors pursued by a trustee, the tax authorities or the RSZ, and provide preventive advice in times of financial difficulty. Also read our articles on judicial reorganisation and on the bankruptcy of a sole proprietorship versus a company.

Call 0484 99 22 72 or email asfour@novexadvocaten.be.