Conic liability. This word did not exist. But now it does. The Amsterdam Court gave a remarkable judgment on September 30, 2015. It concerned a dispute between two shipping companies. The managing director of Fairstar had unlawfully withheld information from the managing director of Dockwise about an obligation of over 100 million Euros. Fairstar had just entered into that obligation before its takeover by Dockwise. Dockwise was suddenly confronted with this huge financial obligation after the takeover. Dockwise had not been given the opportunity to inspect the books in advance. The Court considered that this was not permitted. The managing director and his lackey were considered liable for the loss suffered by Dockwise. Two cones toppled. But, and that is the point here, the supervisory directors were also punished. They were considered liable for the loss beside the management board. The Court held in the judgment that supervisory director Van Riet had shown a “not very critical attitude”, and supervisory director Verhagen “stood by and watched”, according to the Court.

So these supervisory directors were also considered responsible for the unlawful act of their managing director and consequently of the company; because they had done too little. Again, two cones toppled. Because Dockwise has suffered loss on account of the unlawful act of the managing directors and some of the supervisory directors, all supervisory directors are personally liable for compensating this loss towards the aggrieved company Dockwise. They are jointly and severally liable, as legal experts call it. This means that each of them has to vouch for the full loss. So if the managing director cannot pay, not only do the two most involved supervisory directors have to take on his payment obligation, but all supervisory directors have to! Bang! Another six cones toppled! Moreover, all are also internally liable, in principle, towards their own company Fairstar. In so-called follow-up proceedings for the determination of damages, the scope of the loss will now be determined. It can run up to many millions.

Could supervisory directors Van Riet and Verhagen have prevented this disaster? Yes; by doing what may be expected from a supervisory director acting normally and reasonably. By asking critical questions if the management board wants to do something that is not permitted in business and morally. By recording that they have objected at the moment the management board conceals matters that should be public. By not tolerating that normal regulations are ignored. But this sounds easier than it is.

A Supervisory Board has to follow the management board critically. The supervisory board can also be too overbearing towards the management board. In that case a normal and necessary management is frustrated. The supervisory directors do not do their work properly either in that case. And if this causes damage to the company, the supervisory directors might also be liable for it. So it is not that easy. But there is a simple rule for it, “When you can’t stand the heat, get out of the kitchen!” It is therefore very useful to discuss the extent and intensity of critically following the management board at least once a year in the evaluation of the functioning of the Supervisory Board and the management board. It is a fact of life that you can be held liable in case of faulty functioning as supervisor. So properly pay attention. Being held liable without having seen it coming is a sign of serious incompetence. Strike!

Do you have a question about corporate governance yourself? Please e-mail it to governance@ekvandoorne.com and perhaps your question will be discussed in the next blogpost.

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