No automatic liability for directors who do not ring the alarm bell

On 16 September 2021, the Antwerp Court of Appeal ruled on the liability of the directors of a company that did not respect the so-called ‘alarm bell procedure’.

The Court of Appeal decided that the presumption of liability derived from the failure to comply with the alarm bell procedure was effectively rebutted. The directors involved were therefore found not to be liable.

The judgment can be described as groundbreaking. The directors were assisted by Mr Bart Heynickx from ALTIUS.

We assess the case and its impact below.

1. Short reminder of the basic principles

The alarm bell procedure requires the administrators of a limited liability company to convene the shareholders meeting within a period of two months if the company’s net assets have decreased to less than one-half or one-fourth of the share capital as a result of incurred losses.

The shareholders’ meeting must then deliberate on the company’s dissolution or take measures to safeguard its continuity. If the administrators do not (in time) convene the shareholders meeting, then the damages suffered by third parties are presumed to be linked to the administrators’ error.

2. Case put before the court

In the case at hand, a dispute arose between the directors of a company and a former (potential) investor, whereby the latter, after terminating the investment negotiations, reclaimed the funds that had already been made (partially) available to the company. The creditor in question afterwards introduced a claim for damages against the company’s directors because of (among other things) non-respect of the ‘alarm bell procedure’. 

In first instance, the directors were held liable because of the infringement of the alarm bell procedure.

The Court of Appeal overturned this ruling.

It is remarkable that, unlike the first court, the Court of Appeal held that the presumption of article 633 W.Venn. (now article 6:1 WVV) was effectively rebutted.

According to the Court of Appeal, the presumption is rebutted if it is proved that the damage would have occurred even if the shareholders’ meeting had been regularly convened. In the case at hand, the directors provided such evidence by showing that the damage suffered by the creditor was caused by events prior to the date on which the shareholders’ meeting would have had to take place.

Furthermore, the Court of Appeal ruled that the creditor in question in any case knew that the company did not have sufficient assets to pay the claim, which made the alarm bell procedure redundant for this particular creditor.  In addition, the creditor placed its funds at the disposal of a company in difficulty and consequently accepted the risk that the recovery of the funds would be difficult.

Therefore, the Court of Appeal found that the (presumed) causal link between the failure to initiate the alarm bell procedure and the damage suffered by the creditor was rebutted.

As a result, the directors were not held liable.

3. Take-aways

The Court of Appeal’s judgment draws attention to the rebuttable nature of the presumption of liability in the event of a failure to (in time) initiate the alarm bell procedure. The Court of Appeal also provided some grounds supporting the rebuttal of this presumption.

First, this judgment highlighted the importance of the chronology of the facts in this context. If it was already impossible to collect compensation before the directors’ liability was compromised, then this impossibility cannot be due to the director’s failure to initiate the alarm bell procedure. Consequently, the losses suffered were caused by events prior to the date on which the directors had to convene the shareholders’ meeting.

Furthermore, the Court of Appeal emphasized that the knowledge of closely involved parties, such as potential investors, has an impact on possible directors’ liability. By having negotiated with the company and knowing its financial situation, the creditor in question had accepted that recovering its claim was going to be difficult.

In short, although difficult, the presumption of causality between violations of the alarm bell procedure and loss suffered can be countered.