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Director liable for company’s breach of contract?

Director liable for company’s breach of contract?

If a company fails to comply with an obligation or commits an unlawful act, in principle it is only the company that is liable for the damage or loss arising from that. Under certain conditions, however, not only the company, but also a director of the company may be liable. For this kind of liability to be assumed, this director must be able to be personally and seriously blamed for the particular damage. The answer to the question of whether the director is personally and seriously to blame depends on the nature and seriousness of the violation of standards and the other circumstances of the case.

If the director has entered into an obligation on the company’s behalf and the creditor’s claim remains unpaid and proves to be irrecoverable, the director can be held personally liable if, when entering into this obligation, he knew or should reasonably have understood that the company would not be able to comply with its obligations and would not offer any recourse, except if the director can argue circumstances on grounds of which it is justified to conclude that he personally cannot be seriously blamed for the damage.

The Supreme Court recently considered the question of whether a director of a number of private companies was liable because he had, on behalf of those companies, entered into the obligation to grant a first right of pledge, whilst knowing that the companies could only grant a second right of pledge (Supreme Court, 5 September 2014, ECLI:NL:HR:2014:2627).

The facts are as follows. X was (indirect) director of a number of private companies which operated a number of Renault and Nissan locations. In 2001 and 2005 the companies contracted a number of credit agreements with the bank and granted the bank a pledge on their stocks and receivables via various deeds of right of pledge. All these deeds were signed by director X.

RCI is part of the Renault S.A.S. group and provides financing for the resale of Renault and Nissan vehicles on the ‘retail’ level. It concluded various agreements with the companies, each time signed by director X, which agreements stipulated that RCI would provide financing and that the particular company would establish ‘a first right of pledge for RCI’ on its stock and receivables, where the company declared that these assets had not yet been encumbered with any restricted rights. In 2007 the bank cancelled the credit relationship with the companies and levied attachment on, among other things, the companies’ vehicles, under a warrant of execution. RCI attached under warrant of execution the vehicles it had financed. The vehicles were auctioned off publicly. Just over € 3 million from the auction proceeds was paid out to the bank and just over
€ 1 million was paid out to RCI. The companies were then declared insolvent.

RCI then sued director X for payment of almost € 2 million on grounds of its assertion that X had acted carelessly towards it by entering into obligations on the companies’ behalf granting first rights of pledge whilst he knew or should have understood that the companies would not be able to comply with this obligation and would not offer any recourse.

The Supreme Court found that director X’s blame for entering into an obligation on behalf of the companies whilst he knew or reasonably should have understood that the companies would not be able to comply with this obligation only results in liability on the director’s part if the director knew or reasonably should have understood that RCI would suffer damage or loss as a result of the companies’ failure to comply with their obligation.

The mere fact that RCI was given not first, but second right of pledge, contrary to the agreement, does not mean that RCI suffers damage as a result, however. The Supreme Court found that the Appeal Court had rightly concluded that RCI had not adequately asserted that the damage it suffered as a result of not obtaining first rights of pledge was foreseeable at the moment that director X entered into the obligation on behalf of the companies to establish those pledges. Director X therefore escaped unpunished.

By Selma van Ramele

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