Directors' liability for tax debts: what startups and scale-ups should really pay attention to

For startups and scale-ups, directors' liability is often a topic that only gets attention when the pressure is already high. That is risky. Those who look too late at tax payment problems, internal decision-making and the quality of the administration sometimes only discover afterwards that the playing field for directors was much smaller than expected.

In the practice of young growth companies, this is extra important. Rapid growth, fluctuating cash flow, dependence on investments and an organization that is not yet fully crystallized make it tempting to temporarily push taxes, documentation or governance into the background. It is precisely then that a situation arises where directors can come into the picture personally.

Why directors' liability for tax debts is so sensitive

The starting point in corporate law is clear: the company has its own funds and its own obligations. In principle, therefore, the legal person is liable, not the director privately. But there are important exceptions to that starting point. In the event of unpaid tax debts, the tax authorities can hold a director directly liable under certain circumstances. In addition, civil law routes can also play a role, for example via the company itself, a curator or a tort claim.

For tech companies, this is not a theoretical risk. Tax debts are often caused not by one major incident, but by a series of smaller choices: salaries first, suppliers first, a round of financing that arrives later than expected, or an administration that no longer keeps up with growth. The problem is that such choices can become legally burdensome as soon as the company structurally no longer meets its tax obligations.

The key question then is not only whether tax has remained unpaid. The key question will also be how the board acted, what signals there were, whether timely action was taken and whether formal steps were taken correctly.

The tax route: reporting impotence as a tipping point

In the case of tax directors' liability, reporting impotence of payment is a crucial moment. In practice, that report is often the difference between a difficult discussion and an almost lost starting position.

If impotence of payment has not been legally reported, it works very hard. Then, in principle, the legal presumption arises that there is apparently improper administration. This means that the driver no longer starts from a neutral position of evidence. If a report has been validly reported, the bar for liability is different: then it must be made plausible that there was apparently improper administration in the three years before the report.

This is an important distinction for startups and scale-ups. In the first situation, the pressure shifts sharply to the driver. In the second situation, the substantive discussion remains much more about actual governance and the quality of decision-making.

What a valid notification requires

A notification of inability to pay must be made in writing. This should include insight into the reasons why the tax cannot be paid within the statutory period. The recipient can also request additional information about the financial position of the body and about the inability to pay itself. That information must therefore be provided.

That sounds administrative, but it is actually a governance test. A board that cannot clearly explain why payment is not forthcoming, or is unable to provide the requested information, often shows at the same time that internal control is inadequate. For young companies with a lean finance function, this is a clear point of attention. The quality of your administration is not only important for reports and investors, but also for the personal position of directors.

The timing is sharp, even in case of temporary tightness

A second pitfall is timing. The notification must be made without delay. In practice, these are very short terms. In addition, it is important that temporary impotence of payment must also be reported in time. So even if the board expects the liquidity problem to be solved again in a short time, the reporting obligation can already play a role.

That is what makes this topic so relevant, especially for startups. Many growth companies do not live in a stable cash flow, but in leaps and bounds. A delayed customer payment, a deferred instalment from an investment or unexpected costs may be sufficient to temporarily be unable to pay. Legally, then, temporary is not the same as innocent. The board must act in a timely manner.

It is also relevant that impotence of payment does not only exist when there is literally no money left. This can also be the case if there are still cash, but they are used for other due liabilities. So the board cannot simply reason that there is no problem as long as cash is still available somewhere.

Selective payments: sometimes defensible, sometimes dangerous

As soon as the cash register is under pressure, the board must make choices. Paying staff, keeping a critical supplier afloat, or buying space for a possible restart can make business economic sense. But that's where directors' liability comes in.

Selective payment is not automatically unlawful or manifestly improper. There is no general rule that a director always acts unlawfully if he does not take preferences into account when making payments. This nuance is important, especially for companies that are trying to survive in difficult times.

At the same time, that space is not unlimited. Under circumstances, selective payment can indeed contribute to the opinion that there is apparently improper administration. That risk increases if tax debts are left behind while other creditors are being paid, especially when the company is actually already winding down its activities. The legal standard is strict: the decisive factor is whether no reasonably thinking director would have made the same consideration under the same circumstances.

For founders and management teams, this mainly means: document why certain payment choices were made. Not to build a story afterwards, but to test whether the choice is really defensible during decision-making.

A valid notification continues, but not indefinitely

A legally valid notification of inability to pay does not have to be made again for each subsequent period. This is practical, especially in situations where payment problems persist for longer. But that impact is not unlimited.

In any case, the effect ends when the company is fully up to date with the relevant taxes, or when there is actually no longer any impotence of payment. In addition, continuous operation only applies to the specified load. An earlier report is therefore not a general shield against all future tax problems.

For scale-ups with multiple tax flows and rapidly changing financial positions, this is a point to be aware of. An old report quickly provides a sense of security, while the actual protection may be more limited than expected.

Where things often struggle in practice

The tax reporting scheme is intended to quickly identify payment problems and to address improper administration. In practice, the system sometimes works differently. Not only malicious directors are at risk, but also well-meaning directors who have failed to report correctly or in a timely manner.

That makes the arrangement tough. In proceedings, a director can still make it plausible that he has just tried to keep the company afloat, wanted to protect staff, tried to start new activities and did not act in his own interests. However, the absence of a legally valid report can still work hard against him.

For startups and scale-ups, this is perhaps the most important lesson from the tax route: good intentions are not enough. A director can be visibly bona fide and still end up in an unfavorable position of proof. That is precisely why impotence of payment should not be a topic that stays somewhere at the bottom of the legal checklist.

Civil directors' liability: more than just the tax authorities

In addition to the tax route, civil directors' liability also plays a major role. In doing so, a rough distinction can be made between internal liability and external liability.

Internal liability concerns the relationship between the director and the legal person. External liability refers to liability to third parties, such as creditors, or liability in bankruptcy. This distinction is relevant for entrepreneurs, because different parties can choose different routes.

Where the tax reporting regime relies heavily on formal requirements and evidence, civil liability is often more about the quality of the board, the division of tasks, the seriousness of mistakes made and whether a director is personally seriously blamed.

Internal liability: the administrative task is a joint responsibility

A director is obliged to perform his duties properly towards the legal person. In principle, this administrative task lies with the board as a collective. This means that an error cannot always be dismissed as the problem of one finance lead, one co-founder or one operational director.

In principle, internal liability is joint and several. The company can therefore sue one director for the entire damage. After that, a question of recourse may arise between directors. This makes mutual governance within startup teams extra important. An informal division of tasks may be operationally efficient, but it offers less legal comfort if things go wrong.

Liability requires that the director can be seriously blamed on a personal basis. Whether this is the case depends on the circumstances of the case. Relevant include the nature and seriousness of the violation of standards, the company's activities, the resulting risks, the division of tasks within the board, the applicable guidelines and the information that the director had or should have had.

In practice, this means that a director does not easily get away with saying that he did not know about something. Especially if a subject is the joint responsibility of the board, directors can be expected to intervene, distance themselves from improper actions and take measures to prevent damage.

Dividends and distributions: profits to shareholders can also reflect back to the board

A special form of internal liability is involved in profit distributions. The board must approve a distribution and must refuse that approval if it knows or should reasonably foresee that the company will subsequently no longer be able to continue to pay its due debts.

This is relevant for startups, even if traditional dividend payments do not occur every day. In any situation where value disappears from the company while the liquidity position is already vulnerable, the board must carefully assess whether the company can still meet its obligations afterwards.

If the company is no longer able to pay its due debts after a payment, directors who knew or should have foreseen this may be jointly and severally liable for the shortfall caused by that payment. There is also a possibility of disculpation here, but it requires more than just saying afterwards that people did not agree with it. A director will have to show that he is not to blame for the benefit and that he has not been negligent in taking measures.

Bankruptcy: When the trustee looks at the board

In bankruptcy, the playing field shifts again. Then the trustee can sue directors for the entire bankruptcy deficit if they clearly managed improperly in the three years before the bankruptcy and this was a major cause of the bankruptcy.

For growth companies, it is particularly important that the administration can play a decisive role here. If the accounting obligation has been breached or the rules for publishing the financial statements have not been complied with, a legal presumption of improper performance of duties and a causal link to the bankruptcy arises. This makes the curator's position of evidence considerably stronger.

In plain language: messy administration is not only an operational problem, but can immediately turn into a legal backlog for directors in bankruptcy. This is all the more true because the accounting obligation also includes a retention obligation. So not only accounting matters, but also keeping relevant documents.

For startups that scale up quickly, this is often an underestimated risk. A company can have technologically mature eyes and commercial traction, while the internal administrative basis is still too thin for the legal requirements placed on directors.

Actual policy makers can also come into the picture

Not only formal directors are at risk. Anyone who co-determines the policy as if they were a director can also be held liable. This is an important point in companies where the formal structure does not fully coincide with actual power.

This is relevant for young companies, where a lot of decisions are made informally and the dividing line between shareholder, advisor, strategic sparring partner and actual director sometimes becomes blurred. A title in the trade register is not always decisive. Those who actually sit in the chair of the board, give orders that are followed or determine the policy together with the formal board can legally come closer to directors' liability than expected.

Tort: another route in addition to the specific liability regimes

In addition to specific tax powers, the recipient can also opt for a civil law route based on tort. Then it must be proven that there is unlawful conduct that can be attributed to the perpetrator, that damage has been suffered and that there is a causal relationship between that behavior and the damage.

This route is less mechanical than the notification scheme, but certainly not unimportant. For directors, this means that discussions about their actions or omissions can also arise outside the specific tax liability rules. This is important for the tax authorities that, compared to ordinary creditors, they have relatively strong information powers to uncover the actual situation.

In practice, this is particularly relevant in more complex cases, for example where the actual course of events is difficult to reconstruct or where different stakeholders played a role in causing the damage.

What this means for advisors and other players around the company

Although directors' liability is primarily about directors, the discussion can also affect external advisors. Especially when an advisor not only advises, but is actually so close to decision-making that he can be seen as a co-policymaker.

This is relevant for startups and scale-ups because they often rely heavily on external tax specialists, finance professionals or other specialists. External support is logical and often wise, but the division of roles must remain clear. Those who advise should not take over the board unnoticed. And who is a driver must keep steering, testing and deciding.

The most important lesson for founders and scale-ups

Directors' liability for tax debts is rarely just about whether there was too little money. It's mainly about behavior, timing, documentation and governance. Has payment impotence been reported in a timely and correct manner? Was it clear why certain payments were given priority? Was the administration in order? Has the board actively directed and intervened?

At Startup-Recht, we regularly see that fast-growing companies are sensitive to these kinds of risks, not because directors necessarily act recklessly, but because growth, pressure and informal decision-making easily lead to gaps in processes that can be legally difficult.

The practical conclusion is therefore simple, but important: treat tax payment problems as a matter of governance, not as a purely administrative issue. As soon as taxes cannot be paid in time, this directly affects the personal position of directors. If you recognize this in time, you increase the chance that a business problem will also remain business.

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