In terms of civil liability, a distinction is to be drawn between: (a) contractual liability; (b) liability for violations of the AOA and of the Company Law; and (c) tort liability.
Directors are agents of a Company. In the framework of this contractual relationship they are liable vis-à-vis the Company for the fulfilment of their tasks and for any shortcomings in the performance of their duties. 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. In principle, the contractual liability imposed by the Company Law is an individual liability as a personal fault must be involved.
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. So, 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 to the third party.
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 violation of the Company Law or of the AOA. 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 initiate legal actions.
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. 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. 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 initiate legal actions.
In addition to the general criminal liabilities arising under Luxembourg law, the Company Law also imposes specific liabilities on directors. Breach of which will normally incur fines and/ or imprisonment. The most regularly occurring sanctions normally arise out of violations of directors’ duties relating to the provision of information i.e. fraudulent statements regarding Company details or failure to submit annual accounts, another common breach arises from misuse of Company assets or acting outside of the powers conferred by the Articles of the Company or Luxembourg law.
Can a director’s liability be restricted or limited?
The liability of company directors in Luxembourg is a matter of public policy (“ordre public”). Therefore, it is generally not possible to derogate, by contract or otherwise, from the principles described above in terms of liabilities towards third parties.
However, an indemnification relating to the internal relationship between the Company and the director is possible:
Please note that the protection offered by an indemnity agreement is the same as one granted under a D&O insurance policy, and such agreements are generally admitted under Luxembourg law, provided that they do not aim to cover criminal charges.
Please also note that generally speaking, directors will continue to be liable for their actions even after their resignation.
Directors can protect themselves financially from claims introduced by both the Company and third parties by taking out D&O civil liability insurance. Generally, such insurance agreements are signed by the Company for all of their directors, but nothing prevents the director from signing such an agreement in his own name. Most of the civil risks generated by potential breaches of directors’ duties (management errors, violations of the Company Law or the AOA) can be covered by such an insurance policy. However, the insurance policy cannot cover damages which are caused intentionally or by gross negligence. Further, the D&O insurance does not cover a director’s criminal liability.