Director liable towards financier for misleading figures

In a recent case the Amsterdam District Court deemed a director liable for € 2.5 million for misleading interim figures in an Excel document that served as the basis for a loan. Procedural law lawyer Lennard Noordzij explains.

Facts of the case

The claimant is a financier who provides credit to SME entrepreneurs. The defendant director runs an enterprise together with one other director, which enterprise focuses on the worldwide sale and renting out of tents for festivals. In September 2016 the financier provided the private limited liability company of the director with a subordinated loan of € 2.5 million. This was on the basis of financial information provided in an Excel document regarding the private limited liability company. It was stated inter alia in this document that the private limited liability company had achieved a turnover of € 7.6 million up to and including September 2016. The loan agreement The agreement that one party allows a third party to use an item without financial consideration under the condition that that party will return the item.
» Meer over loan agreement loan agreement includes a guarantee that al information provided is correct. The private limited liability company will pay 12% interest and repay the loan in 18 monthly instalments.

In 2018 the private limited liability company once again gave financial figures over 2016 to the financier. It was evident from this that the turnover over the entire year 2016 amounted to € 3.9 million instead of € 7.6 million. The private limited liability company therefore provided incorrect information to the financier. In May 2018 the private limited liability company was declared insolvent. The financier was left empty handed and for this reason held both directors liable for the loan sum of € 2.5 million. He based this principally on the misleading figures that were provided to him in September 2016.

Directors’ and officers’ liability

The debts of a private limited liability company and also those of a public limited liability company, a cooperative, an association and a foundation, are only vested in the business itself (the legal entity) and not in the director or the board. But if the director or the board incurs debts that he knows cannot be paid, or takes so much money out of the private limited liability company that the creditors can no longer be paid, the director himself can become (personally) liable for these debts. There are also other specific legal grounds for the liability of directors. For example, I previously wrote about directors’ and officers’ liability for pension and tax debts if a director fails to report inability to pay to the Tax and Customs Administration or the pension fund in a timely manner.

Directors’ and officers’ liability for misleading figures

A director can also be jointly and severally liable for damage ensuing from misleading figures in annual accounts, interim figures or the directors’ report (Section 249 Book 2 of the Civil Code). The financier based his claim on this section of law. The director, who proves that the misleading representation of the situation of the company in the interim figures cannot be attributed to him, will not be liable. This concerns the interpretation of the words ‘interim figures’. The legislature writes regarding this: “Even if the interim figures cannot be expected to give the same degree of accuracy as the annual accounts ought to give, the reader must be able to rely on the board being so careful that the figures do not deliberately give a distorted representation of the company’s situation.”.

Director’s defence: exculpation

The director argued that it was not he but, due to a mutual allocation of duties, that it was exclusively the other director – the financial man – who prepared the interim figures without his involvement. He also didn’t know the contents of these figures and he did not have the financial knowledge to assess these. For this reason he cannot be blamed.

Judgement of the court: the director is liable due to collective liability

The court dismissed these arguments due to ‘collective liability’. According to the court, an in-house allocation of duties between the directors does not affect the managerial responsibility for the interim figures, which are the prelude for the regime of collective directors’ and officers’ liability. The allocation of a duty to one board member does not release the rest of the board from the responsibility for that duty. The court therefore deems both directors liable.

That the financial figures were provided in an Excel document and not provided as part of official interim annual accounts, should also be of no avail to the director. The court holds that the figures consist of financial key indicators, which are intended to give precise insight into the situation of the group. For this reason the Excel document qualifies as “interim figures” by law.

Conclusion

The court deems the director personal liable for the entire loan of € 2.5 million. This judgment clarifies that directors of enterprises that encounter financial problems, must be extra careful with the financial data that they provide to third parties. Even if this data is not contained in official “annual accounts” and are drawn up by another co-director.