Since 1 May 2018, the outdated Bankruptcy Act and the Continuity of Enterprises Act (the WCO Law) have been brought together in a new legislative book (the ‘Insolvency of Enterprises’). In addition to the extension of the scope to non-profit associations and foundations, the legislation introduces the principle of “wrongful trading” as official grounds for liability.
This means that directors can be held liable, either jointly or separately, when they knowingly (and without expectation of improvement) allow the company to continue loss-making activities, resulting in an unavoidable bankruptcy.
Another important change in the new law is to limit the potential liability of directors. The previous legislation included unlimited liability for directors. Liability will now be limited to certain amounts (‘caps’), which are between EUR 125,000 and EUR 12,500,000 depending on the company’s assets and turnover.
However, this limitation of liability is only valid in case of “accidental minor errors” and creates a false sense of security.
The new limitation does not apply in the following cases: in the event of repeated (“not accidental”) minor errors, serious misconduct, deception, fraud, legal guarantee obligations, fiscal debts (VAT, withholding tax on wages) and social security debts, unlimited liability will therefore still be attributed.
The need for directors’ liability insurance certainly remains an important element in your company’s insurance package. As a director, you protect your private assets.
Given that the limitation of liability only applies to accidental minor errors and not in the other cases listed, directors should remain vigilant as a result of this new legislation.
In addition, a D&O policy also covers more than just the compensation for which the director is liable. The insurance also covers costs that do not form part of a limitation of liability, such as protection costs and investigation costs, which can be high. Finally, it is important to note that the errors made before the entry into force of the new legislation will continue to be subject to unlimited liability in all cases and that the proposed ‘cap’ will apply per claim.
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