In July 2017, draft legislation proposed by minister Koen Geens to introduce the Companies and Associations Code was approved, which focused on fundamental reform of the outdated Belgian company law and the law of associations. We outline below the impact that these changes will have for you as an entrepreneur. The new company law will come into effect in stages, officially entering into force in 2020. Which of the current changes are relevant in the context of your director's liability insurance?
Since 1 May 2018, the outdated Bankruptcy Act and the Continuity of Enterprises Act (the WCO Law) have been brought together in a new legislative book (the ‘Insolvency of Enterprises’).
One important change is the extended scope of application. Both non-profit organisations and foundations are now qualified as enterprises, meaning that they can also file for bankruptcy. This was previously not the case.
This ensures that directors of non-profit organisations can now be held personally liable for grave errors that contribute to bankruptcy.
Additionally, the law introduces the principle of ‘wrongful trading’ as grounds for liability. This means that directors can now be held liable when they knowingly (and without expectation of improvement) allow the company to continue loss-making activities, resulting in an unavoidable bankruptcy. This principle is not completely new, but rather a confirmation of relevant case law.
Another important change is the proposal to limit the potential liability of directors. At present, the current legislation prescribes unlimited liability for directors. In the new proposal, there is a desire to limit such liability to certain amounts, or ‘caps’. These proposed amounts are between EUR 125,000 and EUR 12,500,000, depending on the company’s assets and turnover.
The proposed limitation will not apply in all cases. In the event of deception, fraud, statutory warranty obligations, fiscal debts and social security contribution debts, the upper financial limit will not be taken into account.
A frequently-asked question these days is whether a D&O policy is still necessary when the potential liability is limited, and whether the insured limits should be aligned with the proposed maximum amounts or not.
Our answer here is clear: yes, this policy is certainly still essential. Furthermore, aligning the limits to the upper amounts may not always be appropriate.
The policy offers cover for liabilities as a result of bankruptcy unless a particular exclusion is provided. This usually only occurs if the company is experiencing financial difficulties when the policy is taken out.
Moreover, consideration must be given to the fact that the limitation does not always apply, and that the insurance policy covers much more than a claim in which a possible ‘cap’ may be a factor. The policy provides cover for the following issues, for which there is no liability limitation:
- Claims in relation to taxation and social security (this occurs frequently in practice);
- Certain administrative fines, to the extent that they are insurable;
- Costs as part of research undertaken by a governmental body or regulator;
- Defence costs, which can be considerable;
- The Belgian legislation does not apply to foreign branches and/or external entities.
Finally, it is important to note that there is still unlimited liability for errors made in the past, and that the proposed ‘cap’ would apply for each claim. Naturally, it is extremely important that you read your policy carefully with regard to the cover and applicable exclusions.