Civil liability of the managing director

Managing directors (hereafter "directors") are liable for the management of their company. There are 3 categories of liability to which directors may be subject:  

  • civil liability, which entails the obligation to make good any damage caused. Directors may be liable to their company itself or to third parties;
  • criminal liability: infringement of a legal provision that is criminally sanctioned by financial penalties or imprisonment;
  • administrative liability.

Each of these types of liability is governed by its own specific terms of application. The facts underlying an instance of misconduct may sometimes fall within the remit of more than one liability regime.

The generic concept of what a director is varies depending on the type of company. The liability regime that applies to directors depends on the legal form of the company.

The main aspects of directors' civil liability with regard to the law applicable to commercial companies and the Commercial Code are presented below.

Who is concerned

The various directors of capital companies, whose job title may vary depending on the type of company. These directors are subject to specific types of liability.

Prerequisites

Before a managing director's civil liability can be invoked, 3 conditions must generally be satisfied:

  • a fault must have been committed;
  • damage must have occurred;
  • a causal link must be established between the fault and the damage.

How to proceed

Company action against directors

A civil liability lawsuit against the director of a company must be brought before the commercial court.

A company can bring a suit against its director who is at fault. In limited liability companies, the decision to issue proceedings against the director is taken by the general assembly of shareholders.

Proceedings against the director can be issued by minority shareholders in joint stock companies (SAs), partnerships limited by shares (SCAs) and simplified joint stock companies (SASs), provided that:

  • the shareholders collectively hold 10 % of the voting rights;
  • a discharge vote has not been taken.

A shareholder may bring a suit against the director in their own name if they have suffered an actual, personal or specific loss.

Directors' civil liability to the company

Failure to comply with the company's management regulations

Failure to comply with the company's management regulations may take several forms depending on the company's business.  

Examples:

  • violation of the company's articles of association;
  • irregularities in convening and holding shareholders' meetings;
  • failure to fulfil accounting and legal publication requirements.

Directors are contractually bound to their company. As company officers, they are accountable for any faults they commit. Such faults are assessed against the conduct that is normally expected of a director in a given situation.

In the case of joint management, liability is collective based on a simple presumption. However, an individual director may prove that they have made every effort to dissociate themselves from the collegiate management body's misconduct. For example, they may demonstrate that they chose to vote against the decision and denounced the facts at the general assembly meeting.

Directors have joint liability.

Certain types of misconduct may incur criminal proceedings.

Mismanagement

Mismanagement generally concerns the administration of the company.

Examples:
  • continuing to operate a loss-making business;
  • failure to exercise oversight, absenteeism, neglect of management duties;
  • failure to honour or follow up agreements.

The fault is assessed against the action that a normally diligent director would have taken. Failure to win business does not automatically mean that the director is liable.

Directors may be individually or collectively liable for mismanagement. Liability is deemed:

  • individual if the fault can be attributed to a specific director. In that case, the liability is not joint;
  • collective if, for instance, it is provided for – in particular in the articles of association – or, in the case of joint misconduct, when several directors have acted jointly to cause the damage. In that case, liability is joint.

Directors' civil liability to third parties

Failure to comply with the company's management regulations

Company directors may be held personally liable to third parties – suppliers, customers or creditors – for faults resulting from their failure to fulfil their regulatory obligations.

For example: a false balance sheet may have misled a creditor into granting the company a loan.

In practice, the plaintiff generally issues proceedings against the company, if it is solvent. If the company is bankrupt, proceedings against the directors are issued by the 'curator' (receiver).

Certain types of misconduct may incur criminal proceedings.

Mismanagement

The principle is that the company is liable.

Example:

  • a road accident involving a company vehicle;
  • sale of defective or damaged goods. The company's misconduct may also be tortious. In that case, it is the civil liability of the company, rather than that of its directors, that will be invoked.

Depending on the circumstances, the same facts may also give rise to criminal proceedings.  

A director may be held civilly liable if their fault can be dissociated from their function – i.e. if they did not act in their normal capacity as director. Such action constitutes serious and intentional misconduct, incompatible with the normal performance of the role.

Directors' special civil liability

When the company is insolvent

Extension of the company's bankruptcy to its directors

The court may rule to extend a company's bankruptcy to its directors.

This form of liability may apply to any de jure or de facto director, ostensible or otherwise, whether they are a natural or legal person and regardless of whether or not they receive remuneration as directors.

Directors may be held liable if they:

  • conduct business transactions on behalf of the company for their own personal gain;
  • dispose of company assets as if they were their own assets;
  • abusively continue to operate a loss-making business, for their own personal gain, where the only possible outcome of such operation is the cessation of payments.

When bankruptcy is extended to the director, the latter is deemed personally bankrupt. The liabilities of the bankrupt director then include those of the company, in addition to their own liabilities.

The date of cessation of payments is set in the company bankruptcy order.

Settlement of the company's liabilities

The court may order the director(s) to settle the bankrupt company's liabilities. This measure:

  • applies to the de jure or de facto directors of the company, whether ostensible or otherwise, and regardless of whether or not they receive remuneration as directors;
  • to be applicable, requires proof that the director(s) contributed to the bankruptcy as a result of serious and manifest misconduct.

This procedure may only be initiated by the curator. The amount that the director(s) is/are required to pay is set by the court. The court order to settle the company's liabilities may apply to the director(s) personally, jointly and severally.

The recovered sums are paid to the company, and are used to pay off its creditors.

Directors' tax liability

To the Luxembourg Inland Revenue

The company's directors may be required to discharge tax liabilities to the Luxembourg Inland Revenue (Administration des contributions directes – ACD) in the following cases:

  • the company has been declared bankrupt;
  • misconduct on the part of the director(s) – i.e. the legal representative(s) of the company and/or the de facto or ostensible director(s).

Proceedings may be issued against the directors either individually or collectively.

The tax liabilities in question are:

  • corporate income tax;
  • communal business tax;
  • net wealth tax;
  • taxes on dividends withheld at source.

Example: the company withholds income tax on wages and salaries at source but does not pass on the tax withholdings to the ACD.

In practice, the ACD sends the director(s) a guarantee call-in letter.

An appeal to reverse this administrative measure can be brought before the administrative tribunal. Before the appeal can be lodged, a claim or a hierarchical appeal must have been filed with the director of the ACD.

Registration Duties, Estates and VAT Authority

Directors responsible for the day-to-day management of the company may be held personally liable for liabilities to the Registration Duties, Estates and VAT Authority (Administration de l’Enregistrement et des Domaines et de la TVA – AED) in the following cases:

  • the company has been declared bankrupt;
  • misconduct on the part of the director(s).

This applies to both the legal representatives of the company and the de facto director in charge of the day-to-day management of the company. Proceedings may be issued against the directors either individually or collectively.

In practice, the AED sends the director(s) a guarantee call-in letter. The tax liability must be settled within 1 month.

A claim against the administrative decision may be filed with the director of the AED within 3 months. If no response to the claim is received within 6 months, the claim is deemed to have been rejected.

An appeal against the director's decision can be lodged with the Luxembourg district court.

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