4.3.2.4b ‘No subjective bad faith’ = liable, hence ‘not in good faith’

I now wish to examine those cases in which ‘no subjective bad faith’ was involved, a discharge provision could not provide protection and the director nevertheless was held personally liable to the company (see Figure 4 under C). The cases involve Ceteco1 and Altera Pars Media B.V.2 Note that Ceteco has been double-coded.3 In both cases the claims were instigated by the trustee in bankruptcy.

In Ceteco, the district court ruled that the executive directors and supervisory directors were personally liable to the company for a series of activities, including irresponsible investment and acquisition policy, failing risk management and internal mismanagement, and violation of internal norms and policies intended to safeguard the company against excessive risks.4 The essential legal argument was based on the circumstance that Ceteco’s directors, while conscious of the risks due to over-expansion and knowingly violating internal norms, continued to give priority to the company’s growth strategy to the detriment of the company’s financial capacity and internal organisation. Under these circumstances it can be said that the directors did not act in good faith in serving the interests of the company.

Altera Pars Media B.V. involved an effort by Imca to take over all the shares of Altera’s ailing company. For this purpose, one of Imca’s employees was appointed sole director on Altera’s board. Imca ultimately refrained from acquiring Altera and the director resigned. Altera’s subsidiary companies, printing company B and SSN, were declared bankrupt soon thereafter. The District Court ruled, that the director was personally liable regardless of his service of barely one and an half months.5 In the light of the director’s appointment on the board of Altera in connection with the potential acquisition by Imca, the court assumed that the director was knowledgeable of Altera’s financial affairs. The legal argument was based on the circumstance that the director continued Altera’s centralised financial housekeeping practice to the detriment of its subsidiaries (and creditors of) B and SSN. The court ruled that the director knew or should have known that, by approving the transfers from B and SSN to subsidiary C and subsequently paying only the creditors of subsidiary D, which had no credible prospect of survival (D eventually entered bankruptcy), any possibility of recovery for the creditors of B and SSN was made illusory. Hence, the director did not act in good faith and in the interests of companies B and SSN, on account of which he was subject to serious reproach.6

In these two cases in which ‘subjective bad faith’ was not at issue, the directors nonetheless acted at the very least ‘not in good faith’ and not in the interests of the companies that they served. While Ceteco provides a basis for arguing that the directors were deliberately reckless, it can be argued in Altera Pars Media that the director utterly failed to act in the interests of the company that he served. The cases illustrate that in spite of the absence of malicious intent by a director to cause the company harm, a director nonetheless runs the risk of personal liability if he or she should have known to have acted to the detriment of the company or failed to act in the interest of the company.

The outcome of the two cases described above are interesting for two reasons. First, these two cases demonstrate that courts are inclined to prevent the assumed discharge from having legal effect to actions ‘not in good faith’ and not in the interest of the company. Second, in these two particular cases the court did not review the assumed discharge materially. Instead, the court found an elegant escape by judging that the assumed discharge was not in fact granted to the directors concerned by the general shareholders’ meeting (see paragraph 4.3.2.1) and judged the directors personally liable. It remains therefore uncertain how courts will review discharge claims materially in the face of ‘not in good faith’ actions as were identified in Ceteco and Altera Pars Media. To put it differently, do courts – in reality – require directors’ subjective good faith as a condition for discharge, or objective good faith? Based on Ellem v. De Bruin and De Rouw v. Dingemans7 which I will discuss in paragraphs 4.4.2-4.4.3, it seems not unlikely that a court in practice will honour a discharge to apply under the condition of subjective good faith even though a director’s action qualified a serious reproach. It seems however far away from legal doctrine that a court requires objective good faith as a condition for discharge. If the latter would be true, discharge would arguably be a corporate governance instrument without legal effect.