You’re now officially or soon-to-be an entrepreneur. Congratulations! Beyond the sensation of freedom and accomplishment your business adventure brings, you know it also comes with its share of liabilities. Now you’re wondering which actions, consequences and obligations are on your shoulders as head of the company.
This article will quickly run you through a managing director’s liabilities in Luxembourg.
What is a director?
A company’s director is a corporate officer: the person or people appointed to represent the company in its everyday activities. He or she handles the day-to-day management of the company, makes daily decisions and has the power to make commitments on behalf of the company by signing their name: they are the legal representative of the company.
For instance, in a SARL or SARL-S, the director is known as the manager. In a public limited company, they are known as the administrator. As a corporate officer, the director is responsible for his or her actions and is accountable to the company’s partners.
Combining the roles of employee and managing director/corporate officer
It is possible to be an employee of a company and also be appointed as a managing director/corporate officer at the same time. However, these functions are quite distinct and the employment contract must correspond to the performance of genuine employee functions by the individual. The according tasks may be the subject of an employment contract and therefore be distinct from the corporate mandate as a managing director/corporate officer, characterised by a subordinate relationship between the employee and the employer. In other words, there must be a technical function distinct from that of the corporate mandate. You can find further explanations on the ITM website (available in French or German).
In the case of a company with a single managing director / corporate officer, it is therefore not possible for that person to be an employee at the same time, since he or she cannot be subordinate to him/her-self.
A director’s liabilities depend on their duties.
Before a director’s civil liability can be invoked, 3 conditions must generally be satisfied:
- a fault must have been committed
- damage must have occurred
a causal link must be established between the fault and the damage.
In order to recover damages, the plaintiff must be able to prove these three elements: not only the fault, but also the damage and the link between the two.
Regarding the fault:
- it could be a fault resulting from their failure to fulfil regulatory obligations: when within the scope of his/her management, the director has broken the law or contravened the company statute. Such a fault can be brought to light by the company or a third party. When there are several managers, they are collectively accountable. In such cases, a manager – including the person responsible for day-to-day management – can be relieved from the collective liability if he/she did not partake in the fault, if no fault can be attributed to him/her and if he/she denounced the fault relating to regulatory obligations at the next general meeting.
- it could also be a fault in management: the director failed to correctly carry out his/her management mandate. Such a fault can only be raised by the company, unless it can be detached from the duties of the managing director (for example, when a director oversteps the bounds of their authority for personal gain) in which case it can also be flagged by third parties. In such cases, liability is individual and requires the person who flagged the situation to prove a personal fault attributable to the managing director.
Here again, in order to recover damages, the plaintiff (company or third party) must prove the existence of three elements: the fault (in management or regulatory obligations, depending), the damage and the connection between the fault and the damage.
A managing director’s criminal liability can be called into question if he/she has committed a criminal offence penalised by monetary sanctions or imprisonment. A number of criminal offences can be committed within the framework of managing a company including fraud, breach of trust, moonlighting, and even misappropriation.
Criminal liability can also exist in serious cases such as fictitious dividend distribution, fraudulent non-publication of annual accounts or fraudulent use of company property.
It should be noted that, since 2010, criminal liability also exists for legal persons in Luxembourg. Nonetheless, it does not exempt the managing director from being sanctioned for a same offence as a natural person as well. The two types of liability are not exclusive of one another.
Tax liability (in a broad sense)
According to tax law, the director is required to fulfil the tax obligations of the company he/she manages, most notably paying the taxes due by the company.
This is a personal obligation implying that in the case of non-fulfilment through fault, the concerned tax office sends a guarantee call-in letter obligating the company’s director to personally settle the amount of outstanding taxes unpaid or not transferred by the company.
This rule also applies to VAT and vis-à-vis the Joint Social Security Centre: should a company fail to pay their social security charges, the director can be held personally liable for settling any amounts due.
Do note, according to laws applicable to establishment authorisations, the holder of the business permit is considered to be the director. He/she thus incurs the same tax liabilities as the managing director appointed by the partners, and is generally the person the administration approaches for the payment of public debts left unpaid by the company.
Increased liability (in case of bankruptcy)
There is also a specific liability that comes into play in certain cases involving bankruptcy, when serious misconduct or gross negligence has been committed on the part of the director and their errors resulted in the bankruptcy of the company. Sanctions can include prohibition to conduct business, legal action for repayment of liabilities, or extension of the bankruptcy to the director.
It should be noted that this applies only in cases of serious professional fault and gross negligence, being inexcusable errors or grave misconduct that a regularly prudent and diligent director could not commit. Management errors, mild recklessness or negligence could not give rise to this type of sanction. Similarly, should serious professional fault or gross negligence be identified in the director’s management history but determined to be unrelated to the company’s bankruptcy, the courts cannot impose such sanctions.
It is also important to specify that this type of sanctioning is not automatic. It is left to the discretion of the courts.
There you have the principles of directors’ liabilities. We hope this article has helped you get a better grasp of your role!
The House of Entrepreneurship of the Chambre of Commerce is the national contact point for future entrepreneurs and established company heads alike. (Future) entrepreneurs can contact the House of Entrepreneurship’s information point to move forward with their business creation/takeover project or be put in touch with the relevant structures or partners.
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