A distinction must be made between the civil and criminal liability of a director.
In terms of civil liability, a distinction is to be drawn between: (a) contractual liability; (b) liability for breaches of the articles of association and of the Company Law; and (c) liability in tort.
A) Contractual liability
Directors are agents of a company. They are liable to the company for the fulfilment of their tasks and for any shortcomings in the performance of their duties. It is generally accepted that a claim based on this liability can only be brought by the company.
A finding of liability requires the establishment of three factors: (1) fault; (2) damage; and (3) a causal link between the fault and the damage.
Legal proceedings based on contractual liability, the actio mandati, can only be brought before the court by the company after a simple majority decision of the general shareholders’ meeting. The company may appoint one or several proxy holders to implement this decision. No actio mandati can be brought by the company if discharge was validly granted to the directors by the annual general shareholders’ meeting. Shareholders as individuals do not have the right to bring a claim against the directors on these grounds even if the general meeting refuses or neglects to proceed with a claim.
In principle, the contractual liability imposed by the Company Law is an individual liability as a personal fault must be involved. Insofar as the fault can be attributed to a specific director, his/her civil liability cannot be extended to other directors who did not commit the fault. However, in many cases, the damage results from concurring faults committed by different directors such that without the fault of one of the directors, the faults of the other directors would not have been sufficient to cause the damage. In such cases, each director will be jointly and severally liable. Directors will be held jointly and severally liable if the damage is triggered by a joint fault, i.e. where different people knowingly contributed to the act causing the damage. In such a situation, each director must account for the entire amount of the damages. Any director may be sued and the payment by one director releases all other liable directors from any obligation towards the company.
B) Liability for breaches of the articles of association and of the Company Law
The Company Law states that directors may be held jointly and severally liable to the company and to third parties for all damages resulting from a breach of the Company Law or of the articles of association. Again, fault, damage and a causal link must be established for legal proceedings to be successful.
Legal proceedings can be brought by the company, according to the same rules as those applying to contractual liability. Third parties, such as public authorities, creditors, employees or an individual shareholder of the company, may also bring a claim. A discharge granted to the directors by the annual shareholders’ general meeting does not bar third party claim.
If fault is proven, a presumption of joint and several liability rests on all directors. Any individual director can be held liable for the payment of the entire damage caused by a breach of the Company Law or the articles of association, without the plaintiff having to prove who specifically committed the breach.
C) Liability in tort
The common rules of tort liability, provided for in the Luxembourg Civil Code, are also applicable to directors. If a tort is committed, the injured person is entitled to claim indemnification for the damage caused by the tort.
A tort is committed if the general duty of due care and diligence or a provision imposing a specific obligation of a non-contractual nature is breached.
For a director to be held liable for a tort, the essential elements (fault, damage and a causal link between fault and damage) must be proven on an individual basis. The claim must therefore relate to a breach of a director’s personal obligation.
Legal proceedings can be brought by the company itself or as third parties.
Where the fault is both a breach of an agreement between the director and the company, and a breach of the general duty of due care and diligence that applies to everyone, the company can bring a claim if the actual damage is different from the damage that would have resulted from a fault in carrying out the director’s management tasks (i.e. contractual liability).
Third parties, including creditors and shareholders, can in certain conditions hold directors personally liable for all damages suffered due to a breach of a specific legal provision or the general duty of due care and diligence.
In addition to triggering civil liability, a fault committed by a director may also constitute a criminal offence potentially leading to criminal liability. Examples include the default of publication of the annual accounts, the misue of corporate assets, the non-convening of the general meeting despite a request from shareholders who are entitled to require the holding of such meeting, the purchase of the company’s shares in the absence of sufficient distributable reserves, the granting of security or loans for the purpose of acquisition of the company’s own shares without satisfying the legal conditions to do so, the abuse of powers and votes.
If a director is found guilty he/she can be sentenced to imprisonment and/or a fine depending on the criminal offence.
Tax non-payment related liability
In certain circumstances, directors can be held personally liable towards the tax authorities for payment of the company’s taxes. The tax authorities can issue a guarantee call tax assessment (“bulletin d’appel en garantie”) to the director. The said guarantee call tax assessment determines the principle and the quantum of the debt of the company for which the director is personally responsible. In case of plurality of directors, the tax authorities may address the guarantee to any of the directors.
Moreover, the directors remain responsible for the tax filing obligations even if the tax compliance work has been partly or fully assigned to a third party.
Liability in case of bankruptcy of the company
Bankruptcy is not in itself a punishable offence. However, if it is the result of an error committed by the director, the bankruptcy engages the responsibility of the director. In certain situations where the conduct of the directors had fraudulent character, it is possible to look through the separate legal personality of the company and hold directors personally liable for company’s debts (extension of company bankruptcy to the directors). Further, if directors have committed a gross and manifest fault (“caractérisée”) leading to the bankruptcy, the Luxembourg Commercial Court can decide on a motion from the bankruptcy receiver that any shortfall in the company’s assets is made up from the personal assets of the directors (action to bridge insufficient assets).