Two-tier board of directors: directors’ liability in the event of bankruptcy

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1 GOVERNANCE STRUCTURE

Since the entry into force of the new Belgian Companies and Associations Code, a public limited company (SA/SA) has the option of setting up a two-level governance structure, namely the supervisory board whose members are appointed by the shareholders and the management board itself appointed by the supervisory board. Each must be composed of at least three members, who cannot combine their functions in the two councils. The Supervisory Board is responsible for the general policy and strategy of the company and for all the powers that are explicitly assigned by law to the Board of Directors in a one-tier system. As its name suggests, it must also supervise the management board. The management board is responsible for the operational management, which includes the day-to-day management of the company.

Under the new Code, the jurisdictions of each counsel must be clearly distinct from the other and, therefore, there can be no overlap. The Supervisory Board therefore has only limited means to intervene directly in the operation of the Management Board. General supervision by the supervisory board must remain directive and must not interfere with the powers of the management board. He may, however, dismiss and appoint new members of the management board.

The fact of having distinct competences for each board of directors of a dualistic structure raises the question of whether the responsibility of one board automatically entails the responsibility of the other, in particular in the event of bankruptcy.

2 RESPONSIBILITY OF THE EXECUTIVE BOARD – AUTOMATIC EXTENSION TO THE SUPERVISORY BOARD?

A director can be held liable for decisions or actions if these were demonstrably outside of what would be considered reasonable in that specific situation. Moreover, the liability that directors may incur is joint and several in the case of a collegiate body. In the case of a two-tier structure, this means that accountability will be limited to one level of the board and not extend to the other.

If the responsibility of the management board is engaged, it is necessary to examine whether a failure of the supervisory board contributed to the fault of the management board. In other words, it must be established whether a normally prudent and prudent member of the supervisory board would have acted differently in this situation. In any case, the liability of the management board will not in itself constitute a sufficient reason to also engage the liability of the members of the supervisory board.

3 BANKRUPTCY

With regard to the financial health of a company, three obligations are imposed on directors.

  • Directors are first required to pay continuous attention to the financial stability of the company. In the event of bankruptcy, this obligation is even more crucial and applies to both the members of the supervisory board and the management board. Therefore, if important and concordant facts threaten the continuity of the company, the management board must deliberate on the measures to be taken to safeguard this continuity. However, this does not exempt the Supervisory Board from monitoring the financial stability of the company, as this remains at the heart of the duties of any director.
  • If equity has fallen to less than half as a result of losses incurred, the alarm bell procedure must be respected. It is up to the Supervisory Board to assess the appropriate measures to ensure the continuity of the business.
  • Further, if at any time prior to bankruptcy a director – regardless of which board he or she belongs to – knew or ought to have known that there was clearly no reasonable prospect of preserving the companyhe should have prevented the company from continuing its activities and urged the board of directors on which he sits, to file for bankruptcy.

4. CONCLUSION

Generally speaking, directors’ liability is always limited to the level of the board where the wrongful behavior occurred and does not automatically trigger liability at the other level of the board. This results in a different degree of responsibility for each board. However, in the event of bankruptcy, both boards have an obligation to pay close attention to the financial health of the business. In a dualistic structure, it should be noted that the supervisory board has the additional obligation to trigger the alarm bell procedure. Failure to do so could be grounds for liability in the event of bankruptcy.

In any event, the factual circumstances of a bankruptcy will of course play an important role in assessing the extent of each counsel’s obligations and potential liability.

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