Applicability of the new rules
The new rules on directors' liability are immediately applicable (i) to legal entities that are incorporated as from 1 May 2019 and (ii) to existing legal entities that have explicitly chosen to be subject to the new BCC with immediate effect. For existing legal entities, the new rules on directors' liability are applicable as from 1 January 2020. The new BCC stipulates that the triggering point for determining whether the old or new BCC applies is the date on which the director committed a wrong.
Key changes concerning directors' liability
Apart from clarifying certain existing rules under the old BCC, the new BCC also creates brand-new rules on directors' liability. This makes the new BCC a more complete codification of the rules on directors' liability.
Please note that the same directors' liability regime applies to members of a management body, to daily managers, and also to de facto directors, which are all other persons that have or had real management power over the legal entity. Moreover, it also applies to the directors of associations and foundations.
The new provisions on directors' liability in the new BCC relate to the following topics:
- A liability cap on directors' liability
The most noteworthy change to directors' liability under the new BCC is that liability is capped. Five different caps exist ranging from EUR 125,000.00 to a maximum of EUR 12 million. The applicable cap depends on the size of the company, based on its turnover and its total balance sheet, which is calculated as an average over the three previous financial years.
The liability caps do not apply to certain specific types of wrongdoings, such as habitual minor errors, serious errors and fraudulent wrongdoing. In fact, as a result of these exceptions, the caps only apply to occasional minor errors. However, in practice, directors' liability claims are not often made for these types of errors.
Furthermore, a director’s liability is not capped in the specific context of unpaid corporate income tax, social security contributions or VAT, and in the context of a bankruptcy where under certain circumstances directors are jointly liable for the company’s unpaid social security contributions.
- Strict rules on a legal entity exempting, waiving or indemnifying their directors' liabilities
The new BCC prohibits all mechanisms pursuant to which a company exempts or exonerates its directors from liability in advance, both as regards the company and third parties. Moreover, it is now prohibited for a company to indemnify its own directors in advance for their liabilities to the company or to third parties. This prohibition applies to the legal entity indemnifying its own directors and its subsidiaries or other controlled entities indemnifying the directors of the parent company or the controlling entities. However (and importantly), top-down indemnification remains possible. A parent or controlling entity is still entitled to indemnify the directors of a subsidiary or controlled entity. Also third parties may continue to indemnify directors against liabilities incurred to the legal entity or third parties.
The provisions that clarify and codify previous rules relate to the following topics:
- A positive description of management duties
The new BCC introduces a positive description of the directors' management duties, setting out that the directors have the obligation to “properly” perform the duties that are assigned to them.
- Joint liability as the default liability
The new BCC has adopted joint liability as the default rule. Directors that are organised in a collegial governance body will be jointly liable for all management and supervisory wrongdoings committed in the performance of their duties. Even if the directors are not organised in a collegial governance body, directors will remain jointly liable for all damages arising from breaches of the new BCC or the articles of association. However, if the director had no part in the breach, and the board of directors was notified of the breach by that director, that director will not be held jointly liable.
- The limitation period of 5 years for directors' liability
Under the new BCC, it is clarified that the five-year limitation period applies to the sole manager, to directors, and also to daily managers, permanent representatives of director-legal entities and to the de facto directors. The five year limitation period also applies to associations and foundations.
- The discharge of directors
There is now an explicit legal basis for the discharge of the members of the executive committee (if the articles of association permit a dual management structure). Additionally, the new BCC includes an explicit legal basis for the discharge of members of non-profit organisations.
Impact on D&O Insurance
A D&O insurance covering directors' liability is often included within the traditional insurance package of a company. Such insurance covers the general liability of directors and often also includes defence costs related to such liability.
Under the new BCC, there are no particular changes with regard to D&O insurance, which remains a non-mandatory insurance. However, D&O insurance might still be impacted by the new BCC as a result of the following developments:
- The (limited) impact of the liability cap regime on D&O insurance
The new liability caps were introduced by the Belgian legislator with the intention of increasing the insurability of directors' liability. By setting specific caps on the liability of directors, the insured risk can more easily be assessed by insurance companies, which in turn could decrease the D&O insurance premiums and hence make D&O insurance more widely accessible to directors.
However, it is doubtful whether that objective will be met in practice in view of the many different exceptions to the liability caps. As stated above, the many exceptions to the liability caps result in the caps only applying to occasional minor errors.
However, D&O insurance typically insures wrongdoing that is much broader than occasional minor errors. For example, serious errors, habitual minor errors and gross negligence may be insured under a D&O insurance policy, and may not be limited to the amounts of the liability caps.
Arguing that the insured limits under a D&O insurance policy should be equal to the amounts of the liability caps is thus an over-simplification. This is because directors can be held liable for a very broad range of errors which are in most cases not capped, so D&O insurance policies will continue to play a very important role.
- The liability caps apply per fact or per set of facts triggering directors' liability, regardless of the number of claimants or the number of claims. Interestingly, the first come, first serve rule applies here: once the cap has been reached, other victims will no longer receive compensation for damages arising from the same fact(s). Additionally, in most cases the cap will apply to the entire board as a result of the joint liability principle (see above). Therefore, if one board director has already paid the maximum amount under the cap, no further compensation can be claimed from the other directors of the board.
However, D&O insurance policies typically tend to contain specific insured amounts per claim and per year. These policies are therefore not expressed in terms of facts or a set of facts corresponding to the set-up under the new BCC. Limiting D&O insurance coverage to the amount of the liability cap of the new BCC would provide insufficient protection, since multiple non-related facts giving rise to director’s liability claims could arise in a single year. Only providing coverage up to the amount of the applicable cap in this case would result in insuring directors for one set of facts but then potentially leaving the directors fully exposed to any subsequent liability claims arising from different facts as their coverage will already have been exhausted. It might be that insurers will adjust their policy wording to give effect to the scope of application of the liability caps. However, this is most unlikely as this would change the entire mechanics of a D&O insurance policy.
D&O policies will most likely not be impacted by the new rules applicable to the directors' liability regime under the new BCC. Given the limited scope of application of the liability caps (i.e. occasional minor errors) and the much broader coverage provided by D&O insurance policies, D&O insurance will continue to play a large role even under the new BCC. Having D&O insurance coverage equal the liability caps of the new BCC would provide insufficient protection. Therefore, at first glance, it is doubtful that the legislator’s intention to increase the insurability of directors' liability and lower insurance premiums will succeed.
Furthermore, D&O insurance will become even more important in view of the reduced possibilities of company indemnification mechanisms.