New challenges for Belgian directors in a modern business environment

September 2021 | EXPERT BRIEFING | BOARDROOM INTELLIGENCE

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In recent years, directors of companies of all sizes have faced new risks and an increase in the number of liability claims being made against them. One cause of this increase in Belgium is the recent reform of the Belgian insolvency and corporate legislation which facilitates the introduction of directors and officers (D&Os) claims. The coronavirus (COVID-19) crisis has also had an impact on the number of D&O claims. Not only has the pandemic put companies in a more difficult financial situation, it has also made them more vulnerable to cyber attacks due to the increase in remote working. To protect the company and themselves, D&Os must adapt to these new situations.

More insolvencies

The insolvency legislation has been reformed by the introduction on 1 May 2018 of book XX on the insolvency of enterprises in the Belgian Code on Economics. One of the main changes was the introduction of a new renumeration system for trustees which makes it more attractive for them to actively pursue the liability of the directors of the bankrupt company, thus increasing the odds of D&O liability claims.

The COVID-19 pandemic also put additional stress on companies that were already experiencing structural financial difficulties or resulted in immediate and severe liquidity problems. Directors of such distressed companies are under a lot of pressure and are faced with making decisions which in normal circumstances might not always qualify as decisions that a normally prudent director would reasonably have taken.

To make it even more difficult, shareholders, creditors, employees and other stakeholders are monitoring the financial situation of such companies more closely than ever. The Belgian legislator did introduce several temporary acts to protect companies that are having financial difficulties due to COVID-19, particularly those facing forced bankruptcies initiated by third parties, and allowed them to postpone tax payments. However, most of these measures are now being lifted, even though many companies are still suffering from the financial consequences of the pandemic. We therefore expect to see a significant increase in the number of bankruptcies or other insolvency proceedings over the coming year.

Cyber risks

Technology is becoming more important than ever within companies, and this trend will continue into 2022. The doctrine and case law in respect of the European Union’s (EU’s) General Data Protection Regulation (GDPR) which entered into force on 25 May 2018 is also evolving. This puts additional stress on directors as they could be held liable if they do not implement adequate privacy and data protection policies. This challenge is further complicated by the fact that due to COVID-19 the risk of data breaches is increasing even further. Many companies were not prepared for the mass migration of employees to remote working, often from their own personal devices, which caused more cyber attacks and data breaches.

Protection against personal liability

More than ever, it is important that directors consider the possibility that they might be confronted with D&O claims and they must ensure that they are sufficiently protected. D&O liability insurance coverage is a great way to limit the personal liability of directors, but in an ever-changing business landscape, it is important to ensure that the policy is sufficiently adapted to the new challenges that directors are facing. A policy that was put in place a few years ago and which has been automatically renewed might no longer be adequate. The caps that were put in place a few years ago might now be too low. Moreover, the policy might not provide coverage for specific risks that were not a real concern at the time the policy was taken out, but which now constitute a real exposure.

Parent-company guarantees might also be an efficient way to protect directors against D&O claims. However, such guarantees do not protect the directors against the insolvency of the guarantor. Within a group context it is also important to verify whether the entity that provides such a guarantee is allowed to do this from a legal perspective. For instance, the reform of the Belgian Code on Companies now explicitly prohibits a guarantee for director liability of a company that directly controls the entity that grants the guarantee.

Compliance management

All the above demonstrates that the risks directors face are constantly evolving. The new Belgian insolvency and corporate legislation and COVID-19 pandemic have certainly contributed to a further increase in the number of claims against directors. The further codification in various areas of law makes things even more complex. Directors are in the firing line and must comply with numerous laws that could lead to liability claims. The best way to protect directors from the liability of those new risks is by implementing a good compliance management scheme and remaining mindful of the shifting risks that can lead to liability claims.

Virginie Frémat is a partner and Pieter Dieltjens is a senior associate at CMS DeBacker. Ms Frémat can be contacted on +32 496 61 91 52 or by email: virginie.fremat@cms-db.com. Mr Dieltjens can be contacted on +32 3 206 01 48 or by email: pieter.dieltjens@cms-db.com.

Virginie Frémat and Pieter Dieltjens

CMS DeBacker