Corporate series- Chronicle #4 Directors’ duties and Legal Liabilities in Luxembourg

Though directors of Luxembourg-based corporations are protected by the so called “corporate shield”, meaning that they cannot be personally liable when acting for the company, they may nevertheless and under certain conditions, be held liable under civil, criminal, and bankruptcy law. Their primary liability is controlled by the Companies Act, the Civil Code, and the Commercial Code.

1. Civil Liability

Directors may be subject to civil liability under three main circumstances:

- Internal liability to the company – directors must always act in the best interest of the company and can therefore be sued for negligence in the performance of their duties. This requires proof of fault, damage to the company, and causation.

- Liability to third parties and the company - directors are also jointly and severally liable for violations of the Companies Act or the company's articles of association. This applies to acts such as failure to convene meetings or to timely publish financial statements.

- General Civil Liability - Based on general tort law governed by the he Civil Code, directors may be held liable for damages caused by their fault, even if they do not fall under the Companies Act.

A director's resignation does not relieve the latter of liability. Moreover, the Companies Act establishes a joint and several liability assumption, meaning that all board members will be deemed collectively liable, unless and until evidence to the contrary.

2. Criminal Liability

Certain violations by directors may result in criminal charges under the Criminal Code and the Companies Act, including

- Falsification of corporate documents 

- Misappropriation of funds 

- Distribution of fictitious dividends

- Fraudulent alteration of financial statements 

Penalties range from fines of up to EUR 250,000 to imprisonment for up to ten years.

3. Liability in Bankruptcy Cases

When a company goes bankrupt, directors may face

- Civil liability for mismanagement leading to insolvency: this can also apply when the directors don’t file for bankruptcy in a timely manner. In this case they may be held liable for the portion of the liabilities’ increase

- Liability under the Commercial Code, where they may be held personally liable for outstanding debts if serious mistakes contributed to the bankruptcy.

- Criminal penalties, including imprisonment and disqualification from managing companies, particularly in cases of fraudulent bankruptcy.

In serious cases, directors may be banned from conducting business for up to 20 years.

Conclusion

Luxembourg law protects directors when acting within their function. However, it also imposes strict liability rules on them to ensure accountability. Directors must be diligent and must not act ultra vires , as violations can result in civil claims, criminal prosecution and severe penalties in bankruptcy situations.