In bankruptcy proceedings, directors under the articles of association (“formal directors”) of a Dutch B.V. or N.V. can be held liable by a bankruptcy trustee on the basis of specific articles of the Dutch Civil Code concerning manifestly improper management. This specific liability regime for directors does not apply to other third parties, such as shareholders or high-ranking employees. However, other parties who are not formally directors may fall within the scope of this liability regime if they qualify as de facto directors who determined or co‑determined the policy of the company as if they were formal directors.
In its decision of 24 March 2023 (ECLI:NL:HR:2023:445), the Dutch Supreme Court further clarified the legal concept of the de facto director. The Supreme Court ruled that, in order to qualify as a de facto director, it is not required that the de facto director managed the company instead of, and to the exclusion of, the formal director(s). Liability therefore does not require that the formal director(s) are ‘set aside’ by the de facto director.
Liability of directors in bankruptcy
In general, directors of a Dutch B.V. or N.V. are not liable for obligations of the company they are managing. Directors have considerable liberty to act as they deem fit, as long as the company is eventually able to meet its obligations when they become due. However, in the case of a bankruptcy where one or more claims remain unpaid, a bankruptcy trustee may hold directors liable for manifestly improper management that was an important cause of the bankruptcy. If the books and records are not in order or if the company has not complied with financial reporting standards, manifestly improper management is established and it is assumed that this was an important cause of the bankruptcy. If a bankruptcy trustee’s claim is successful, each director is jointly and severally liable in relation to the bankrupt estate for the deficit in the bankruptcy, being the amount of the liabilities to the extent that these cannot be satisfied by the liquidation of the other assets. Individual directors can be exonerated if they can demonstrate that they cannot be held liable for the manifestly improper management and that they did not fail to take measures to mitigate the consequences of the manifestly improper management.
This liability towards the bankruptcy estate can also apply to a de facto director. A de facto director is a person or entity who is not a formal director, but who determined, or jointly determined, the policy of a company as if he or she were a formal director.
When does a person qualify as a de facto director?
To determine if a person determined the policy as if he or she were a formal director, all the circumstances of the case at hand must be taken into account. A person can be qualified as a de facto director if he or she acted as a formal director and effectively determined the company’s policy. This means that parties such as financiers, government observers, corporate advisers, supervisory directors, members of a works council and shareholders generally do not qualify as de facto directors if, by virtue of contract or by virtue of their statutory powers, they influence the actions of the formal directors. They become de facto directors only if they effectively determine or co-determine the company’s policy as if they were directors.
In the case leading to the Dutch Supreme Court’s decision of 24 March 2023 (ECLI:NL:HR:2023:445), the Court of Appeal had decided that the former director of the legal entity who had incorporated a Dutch B.V. that later entered into bankruptcy proceedings qualified as a de facto director of that insolvent B.V. Circumstances that contributed to this qualification were that this person had effectively concluded and executed a financing agreement on behalf of the B.V. by commenting on outstanding items, signing related agreements and asking the bank to change the address of the Dutch B.V. to her private address.
Setting aside of formal directors
Until the Dutch Supreme Court’s decision of 24 March 2023, it was not clear whether it was required that formal directors had to be ‘set aside’ (terzijdestelling) for another person to qualify as a de facto director. In its decision, the Supreme Court ruled that it is not required that the de facto director managed the company instead of, and to the exclusion of, the formal director(s). Taking into account all the circumstances of the case at hand, for a de facto director to qualify as such, he or she must have assumed at least part of the authority to manage the company, and consequently determined or co-determined the policy of the company as if he or she were a formal director. This may also be the case if the formal director(s) continued to perform their duties and were not ‘set aside’ by the de facto director. Potential de facto directors therefore cannot avert liability solely on the basis that the board is still performing its duties.
The post “Dutch Supreme Court decides on liability of de facto directors under Dutch law: ‘setting aside’ of formal directors is not required” is a post of www.stibbeblog.nl
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