PART II: Joint and several liability and exoneration

Part II of this thesis explores the scope of the basic principle of joint and several liability of directors under Articles 2:9 and 2:138 DCC, focusing on the individual's position within the collective board. Specifically the position of a non-executive director in a one-tier board is examined, whereby the legai effect of an allocation of tasks between board members on the liability of the individual director is analysed. In this thesis I defend the view that the allocation of tasks should be a more decisive criterion for establishing liability of individual directors. To this end the main categories of directors' duties could be laid down in the Dutch Civil Code, allowing the joint and several liability to be linked to the relevant category and limited to the directors responsible for them. The thesis presents an alternative text for Article 2:9 DCC, on the basis of which it is also avoided that director's liability based on that provision has punitive effects.

Chapter 4 sets forth the basis of director's liability, as laid down in the first sentence of Article 2:9 DCC. The basic premise is that a director is responsible for a proper performance of the tasks he is charged with and is liable for any failures in that respect. However, it is generally assumed that the board of a company is collectively responsible for the management and that there is to some extent joint and several liability, in any event to the extent a matter falls within the sphere of duties of two or more directors. This rule has been made explicit in the law since 1925, starting with Article 31 of the Cooperative Associations Act (Wet op de Coiiperatieve Vereenigingen). In the meantime, the rule has evolved to the text of Article 2:9 DCC, but the basic rule has essentially remained the same. Not much has changed in that regard in the past hundred years.

Since 1990, a debate has ensued in the literature as to the significance the sphere of duties criterion of Article 2:9 DCC has for the liability of directors of public companies, the question being whether joint and several liability according to that provision extends by definition to all (managing) directors of a public company, or solely to those directors to whose sphere of duties a specific task belongs. I believe that this debate may be solved by the legislative history of Article 47c (former) Commercial Code, which was nearly identical to that of Article 31 Cooperative Associations Act, on which the current text of Article 2:9 DCC is based. It may be inferred from the text and the legislative history of this rule that an allocation of tasks may also take place within the board of a public company and that individual members of the board whose sphere of duties does not include a specific matter are, in theory, not affected by joint and several liability. However, in its standard ruling in Staleman v. Van de Ven the Supreme Court mentions the allocation of tasks as only one of the relevant circumstances in the instance for assessing whether a director meets the standard of serious blame.

The sphere of duties criterion has not been included in the text of Article 2:138 DCC. The legislative history of Article 2:138 DCC shows that individual directors cannot successfully rely on exoneration due to an allocation of tasks between board members, because it was assumed that financial policy is a matter that concerns all directors. In practice, however, various causes may lead to a company's demise. If the cause of bankruptcy is to be found in a specific task that formed part of the portfolio of a specific director and could not otherwise be regarded as forming part of the general course of affairs, it should be possible, in my view, for other directors to be exonerated from liability.

A major weapon in the hands of a receiver when applying Article 2:138 DCC is paragraph 2: If the board failed to fulfil its obligation to keep records and accounts in accordance with Article 2:10 or 394 DCC, it is an established fact that the board has failed to properly perform its tasks, giving rise to the suspicion that the failure to properly perform its tasks was a major cause for the insolvency. In Kobo the Supreme Court ruled that if the board failed to fulfil the afore-mentioned accounting obligations "it has to be unconditionally assumed that each of the directors has manifestly failed to properly perfonn his tasks for the remainder as well."

In my opinion it has been incorrectly assumed in literature that this phrase precludes the possibility of individual exoneration as provided in Article 2:138 (3) DCC in situations in which the accounting obligations have not been met. In that event there would supposedly be no room for an opinion regarding the absence of attribution to the individual director with respect to the improper performance.

I believe that this interpretation is in contravention to the text of Article 2:138 DCC and the legislative history, in which it is clarified that an exoneration defence is also acceptable when there are no proper accounts and financial statements. In my view, the court should have room to assess the individual exoneration defences of directors in respect of the obligations of publication and keeping proper accounts, including a defence that relies on an allocation of tasks between board members. If such exoneration defence succeeds, the receiver should have to assen and prove with respect to that (those) individual director(s) that according to the general rule of Article 2:138(1) DCC on the basis of the merits of the performance of the tasks by the board, that (for the remainder) the performance has been manifestly improper.

The joint and several liability of directors under Articles 2:9 and 2:138 DCC may be regarded as group liability. A view regarding such liability may be developed in line with the rule set out in Article 6:166 DCC, which provides for joint and several liability arising from tortuous conduct as a group. Liability under Article 6:166 DCC requires evidence of awareness on the part of the individual participants that others apart from them, having the same awareness of the concerted action, have been involved in conduct of which they should have refrained in view of the chance that it might result in damage. This same principle may also be applied in respect of director's liability. The mere fact that someone is a director would then be an insufficient ground for liability. Assessing an exoneration defence would in that case depend on whether the individual director who forms part of a group of directors — to whose task (or sphere of duties) the contested issue belonged — is able to prove that he did not know or could not be expected to know that the concerted action created the risk of the damage as it was actually suffered. If a director succeeds in providing this proof, he may be able to avert the failure in the proper performance being attributed to him and consequently of being held liable. Moreover, the liability under Articles 2:9 and 2:138 DCC could be linked to performance of the tasks of the individual director, without the premise that the board in its entirety is jointly and severally liable in the event of a failure in the proper performance.

Chapter 5 deals with the liability position of directors in a one-tier board. Under Dutch law, a non-executive director who forms part of the board is liable as a director. The starting point for the assessment of the performance of the non-executive director is the performance of the tasks by the board as a group. The tasks of the liability of a supervisory director are solely assessed in respect of his supervisory role.

In practice, the position of non-executive directors will in particular be different from that of supervisory directors in that they sit in at board meetings and consequently take part in the decision-taking process regarding board resolutions, whereas supervisory directors are typically confronted with resolutions after they have been adopted. As a general rule it may be said that the provision of information to non-executives is better, both as regards the moment when it is provided and as regards its quality and quantity. To this extent there is something to be said for the premise that non-executive directors are sooner liable than supervisory directors.

However, due to the more restricted role allocated to non-executive directors, an information discrepancy might arise within the board between executive and non-executive directors. The applicable liability regime should take this into account.

On the basis of the formal allocation of tasks, non-executive directors will be able to rely on exoneration from liability for matters concerning the execution of the policy more easily than their fellow executive directors. However, this is not an unrestrained ground for exoneration. It will at all times depend on the circumstances of the case whether such reliance will be successful. The manner in which the non-executive director has fulfilled his tasks should also be considered. In the present state of the case law it is unclear how these factors are weighed and to what extent an allocation of tasks in a one-tier board might result in a successful exoneration of non-executive directors.

Under the Legislative Proposal On Govemance and Supervision the one-tier board structure will acquire legal status. Companies will retain ample freedom regarding the set-up of the one-tier board model. However, the proposed amendment of the text of Article 2:9 DCC weakens the position of nonexecutive directors, since the sphere of duties is no longer a constitutive requirement for liability. Furthermore — as is the case in the current Article 2:9 DCC — the proposed amendment makes insufficient distinction between the various kinds of tasks a director may have, i.e.:

In my view, joint and several liability can only exist, in case two or more directors are responsible for a certain task. This distinction between different tasks should be included in Article 2:9 DCC. The liability regime in Article 2:138 DCC may be linked to the tasks categories thus included in Article 2:9 DCC. By not including this division, the legislator insufficiently recognises the special position of the individual — especially the non-executive — director, which will leave the assessment of his position entirely to the courts.

Another argument for amending Article 2:9 DCC is that the current phrasing of the Act — and the rules as proposed by the Legislative Proposal On Govemance and Supervision — may lead to punitive effects; directors may be held liable for damage that cannot be attributed to their acts.

This effect may first of all be caused in the event of joint and several liability, in case individual directors are insufficiently able to have recourse against their fellow directors. Secondly, such effect may occur if the grounds for exoneration are interpreted in a restricted manner and in practice the system of joint and several liability translates into a strict liability. A third effect occurs if insufficient distinction is made between the various kinds of tasks of the individual directors. This may for instance be the case in the event a nonexecutive director insufficiently supervises the executive directors and he is not only held jointly and severally liable for the damage caused by the faulty supervision, but also for any other damage that is caused by the executive director's acts. A final punitive effect is caused by the manner in which the grounds for exoneration have been phrased. For instance, a director may exonerate himself in case he has not failed to take measures in order to avert the consequences of the improper management. If a director has failed to do so, he is fully liable for the damage caused by the board's improper performance, and not solely for the damage that is caused by his failure to take sufficient measures to mitigate the damage as soon as he became aware of the improper performance.

Specifically in respect of a one-tier board — but in fact in other situations as well — a more evenly balanced system of joint and several liability, which sanctions individual responsibility with customised liability, would be desirable. This thesis formulates alternative texts for Articles 2:9 DCC and 2:138 DCC.