Corporate Litigation: As a director, can I take on new obligations for the company in times of financial uncertainty?
Developments surrounding the COVID-19 outbreak (such as a supply chain disruption, cancellations, etc.) may affect your company's business and cash flow and cause financial distress, meaning there is a concrete risk that the company will be unable to satisfy its debts as they fall due in the near future (generally, 12 months). As a director, you may ask yourself whether you are still allowed to take on new obligations on the company's behalf and whether you could incur personal liability in doing so, should the company eventually go bankrupt.
According to Dutch case law, directors can be held personally liable if inter alia they incur obligations on the company's behalf when they knew or should reasonably have known (on the basis of up-to-date financial information) that the company would not be able to meet these obligations.
Thus when entering into new obligations, directors should assess whether the company will be able to meet them. New obligations (such as a purchase of stock or services) may be required to continue the business. Directors then face a quandary: do the chances of survival warrant incurring new obligations or are the chances too slim? Although Dutch law does not require businesses to file for a payment moratorium or bankruptcy (unlike in some other countries), this could be the more prudent choice if going concern solutions are no longer viable.
Coping with this dilemma could prove especially difficult in the current extraordinary circumstances. However, one point to consider is that on 17 March, the Dutch government announced far-reaching measures to help businesses stay afloat during the COVID-19 crisis. An estimated ten to twenty billion euros will be injected into the economy through what is described as the Emergency Package for Jobs and the Economy (see also "State Aid: How can governments help"). This could justify the expectation that a company will be able to meet new obligations, depending of course on its specific circumstances and sector of activity.
In addition, directors of a company in financial distress should take care to:
- ensure that proper financial records are maintained, including preparing and publishing the company's financial statements on time;
- ensure that the Dutch tax authorities are informed immediately if it becomes clear that the company cannot pay its social security contributions, taxes or pension contributions;
- adhere to the applicable procedure: taking decisions in accordance with the articles of association, board regulations and Dutch law in general and properly documenting them; and
- in the decision-making process, openly acknowledge the financial challenges the company faces and explicitly communicate the assessment on which the decisions are based.