Can a corporate director be declared bankrupt? The organisation criterion unravelled.

Suppose a company goes bankrupt and the director personally guaranteed the company. Is this director also himself a company that can be declared bankrupt, separate from the company in failure?

It is an issue that provokes considerable debate in the Belgian legal landscape, especially in bankruptcy cases.
Novius lawyer and bankruptcy trustee Dorien Avaux set the stage for a similar case in 2023 and points to the importance of the organisation criterion from the Court of Cassation case law. "The judgment of the Court of Cassation of 18 March 2022 sets out the outline, for the concrete interpretation it is up to the corporate courts."

As the case took place before the new insolvency law came into force, the director himself filed a formal application to obtain the waiver. The bank filed a third-party objection to this. It held that the lady could not be considered a company within the meaning of Article I.1, paragraph 1, 1° of the Economic Law Code (WER) and therefore not a bankrupt. Dorien explains. 

"Article I.1, first paragraph, 1° of the WER states that a natural person can qualify as an undertaking if it independently carries out a professional activity. If we test this article against the relevant case law and legal doctrine, the Supreme Court ruling of 18 March 2022 plays a key role. This cassation judgment states very clearly that a natural person can be considered an undertaking if it demonstrates that it constitutes an organisation consisting of all its own material, financial or human resources brought together for the purpose of exercising an independent professional activity." 

In its opposition, the bank refers to this organisational criterion and argues that the director is not an undertaking because it does not have its own distinct organisation. However, the Brussels Enterprise Court ruled otherwise and confirmed that the director does meet the organisational criterion. Dorien explains the court's reasoning. 

"Specifically, the case handler had paid social security contributions as a self-employed person and took a director's salary, thereby receiving a full income. In doing so, the court clarified that the lady did not have to be registered in the CBE. An additional argument is that by entering into the personal guarantee, she also bore the business risk. Moreover, she had a mobile phone, computer and office. From the totality of these elements, the court decided that there is a minimum of own organisation, in line with the Supreme Court's interpretation."

The Brussels Enterprise Court thus follows the reasoning of the Court of Cassation in this case. Nevertheless, the organizational criterion is not free of controversy.

"Several authors criticize the fact that the Court of Cassation adds an additional condition to the legal criterion. Nevertheless, the Court confirms its case law in subsequent judgments," Dorien says. The cassation judgments of Feb. 9 and Nov. 23, 2023, are essential in this regard. On Feb. 9, the Court of Cassation overturned a decision of the Brussels Court of Appeal: in the issue of whether a director was a company, the appellate judges had not examined whether there was an "organization. The Court of Cassation whistled back the appeals court, confirming the importance of the organization criterion. That view was recently confirmed in a cassation judgment of Nov. 23, 2023.

Thus, the organizational criterion remains in force, although it is uncertain how this condition will evolve in the future. According to Dorien, the concrete interpretation of the concept depends on the actual assessment of the corporate courts. 

Thus, whether a corporate director qualifies as a corporation and can therefore go bankrupt depends on a factual assessment. As an entrepreneur, do you want to be sure of your piece, for example when entering into (credit) contracts? Preventive advice from a corporate law attorney offers long-term peace of mind. 

"Small print often has a big impact, especially when a business gets into turbulent waters," says Dorien. "Take, for example, a cash loan with surety: these are usually very expensive forms of financing, the debt of which becomes due in full in the event of bankruptcy. On the other hand, interesting protection mechanisms, such as the declaration of the unseizability of the family home, are still underused in practice. At Novius, we place enormous emphasis on prevention. By proactively getting around the table and going through all the scenarios, we avoid dramas afterwards and help entrepreneurs move forward in a targeted way."