Liability of a former director for the company’s tax debts

January 17, 2023

The Supreme Court (in Dutch: “de Hoge Raad”) recently ruled in a case regarding the liability of a former director for the tax debts of the company he was a director of. The Supreme Court decided that a former director can only be held liable for the tax debts of the company if the company is in default of paying those debts. In addition, the Supreme Court decided that a director is in principle free to decide which creditors to fulfill first based on his own deliberations. This case is of particular interest due to the examination of the liability of a former director for a company’s tax debts without the company being in default of payment of such, as well as the potential for exculpation as a defense.

Facts and circumstances

During 2014 and 2015, the appellant was the director of an Aruba-based public limited liability company (“the company”). In 2013 and 2014, profit tax assessments regarding the financial years 2007 and 2008 have been imposed on the company. Those assessments were (largely) unpaid. The Tax Collector (in Dutch: “de Ontvanger”) held the appellant, as a former director, liable for the unpaid assessments of the company. More specifically, the dispute focused on the questions whether it is relevant for the liability claim that (i) the assessment was due and payable at the time when liability was declared, and also whether (ii) the company was in default at that time.

Previous judgments

The Court of First Instance (in Dutch: “het Gerecht in eerste aanleg”) decided that a former director can only be held liable for tax debts of the company as soon as the tax debts are formalized in a tax assessment. In contrast, the Court of Appeal (in Dutch: “het Gerechtshof”) decided that a former director can already be liable for tax debts of the company from the moment the relevant financial year ends. For this reason, in the present case, the Court of Appeal ruled that the former director could be held liable even though there were no unpaid due tax assessments. The Court of Appeal furthermore dismissed the former director’s defense of exculpation because the former director did not use the available cash to pay the tax debts in priority to other debts. The former director contested the Court of Appeal’s decision to the Supreme Court.

The decision of the Supreme Court

Payment default

The Supreme Court held that liability can only occur as soon as the company is in default of paying its tax debt. The company may be in default of paying its tax debt only after (i) that debt has been formalized by the establishment of a tax assessment, (ii) he has had the opportunity to take notice of that assessment, and (iii) payment has not taken place while the tax assessment is collectible. The assessment is not collectible during the period that the tax debtor was granted a postponement of payment. As long as the Tax Collector has not yet decided on a request for deferral of payment, it must be assumed that the tax debtor enjoys deferral of payment and that he is not in default of paying the tax debt. In the present case, the former director was held liable in 2016 for the company’s tax debt regarding the financial years 2007 and 2008. According to the considerations of the Supreme Court, the former director can only be held liable for those debts if the company was in default of paying at that time.

Exculpation

With regard to the possibility of exculpation, the Supreme Court considered that the conditions for exculpation are met if the former director proves that he did not fail in the proper exercising of his management duties regarding the company’s fulfillment of its financial obligations, including non‑tax obligations. In this regard, there is no general rule under which a debtor who is unable to fulfill all his creditors always acts improperly when he fulfills one creditor before other creditors, even if he does not take into account any possible preferences. In principle, a director of a company is free to decide which creditors to fulfill first based on his own deliberations. This freedom is, however, limited if the company has decided to end its activities and does not have sufficient resources to pay all its creditors. The Court of Appeal misconstrued this according to the Supreme Court. The Supreme Court has therefore sent the case back to the Court of Appeal to reconsider the case taking into account the Supreme Court’s considerations.

Points of interest

• A former director can only be liable for the company’s tax debts if the company is in default of paying those debts.
• The assessment is not collectible during the period that the tax debtor was granted a postponement of payment. As long as the Tax Collector has not yet decided on a request for deferral of payment, it must be assumed that the tax debtor enjoys deferral of payment and that he is not in default of paying the tax debt.
• A director of a company is in principle free to decide which creditors to fulfill first based on his own deliberations. This freedom is, however, limited if the company has decided to end its activities and does not have sufficient resources to pay all its creditors.