Liability of foreign director in Dutch bankruptcy: are natural persons exempt?

Introduction
Director's liability under Section 2:11 in conjunction with Section 2:248
Comment

Introduction

Unlike in some jurisdictions, in the Netherlands both natural persons and legal entities can act as directors of a legal entity. Since many large corporations have Dutch legal entities within their structure, legal entities often act as directors and shareholders of other legal entities, with the ultimate owner being high up in the structure.

Until recently it was unclear whether a director of a legal entity could incur director's liability under Dutch law when the director was a legal entity incorporated under the law of another country (a 'foreign legal entity') or a natural person acting as the director of such a foreign legal entity. The Supreme Court's ruling in D Group v Schreurs(1) has provided clarity in this area.

Section 2:11 of the Civil Code states that the director of a legal entity shall be jointly and severally liable with the legal entity for the legal entity's liability, provided that it was director at the time when the liability arose.(2) Furthermore, Section 2:248 of the code reflects one of the main grounds for director's liability in bankruptcy and aims to encourage directors to keep the legal entity's accounts up to date and to publish them on time.

In D Group the Supreme Court confirmed that Section 2:11 also applies to a foreign legal entity that acts as director of a Dutch legal entity. It confirmed the liability of a legal entity, incorporated under Belgian law, on the basis of Section 2:11 in conjunction with Section 2:248 of the code. The Belgian legal entity was a director and shareholder of a Dutch legal entity, which in turn was a director and shareholder of several Dutch legal entities. The Dutch holding company and three of its subsidiaries went bankrupt, after which the bankruptcy trustee of these subsidiaries initiated proceedings against the Belgian legal entity.

In D Group the Supreme Court has also confirmed that whether the natural person that acts as director of the foreign entity could be liable is a question of the law applicable to the foreign legal entity. This means that liability of directors under Section 2:11 does not go beyond the foreign legal entity, unless the law applicable to the foreign legal entity provides for liability on a similar ground. This confirmation of the Supreme Court has limited the scope of Section 2:11, the aim of which is to prevent directors of legal entities to protect themselves from liability by hiding behind a legal entity.

Director's liability under Section 2:11 in conjunction with Section 2:248

Section 2:248 is frequently used in bankruptcy as a ground on which to hold directors of a bankrupt Dutch private limited liability company liable. On the basis of this provision, a bankruptcy trustee can hold each director jointly and severally liable towards the bankrupt estate for the amount of the liability to the extent that these obligations cannot be satisfied from the liquidation of the other assets. In order for this claim to succeed, the bankruptcy trustee must:

• assert and prove that the board of directors manifestly performed its duties improperly; and
• make a reasonable case that it is plausible that this was an important cause of the bankruptcy.(3)

Proceedings may be initiated by the bankruptcy trustee only on the grounds of the improper performance of duties in respect of duties performed during the three years before the bankruptcy.

As the improper performance of duties and the causal relationship with the bankruptcy itself is not always easy to prove, the board of directors is declared to have performed its duties improperly and it shall be presumed that this improper performance constituted an important cause of the bankruptcy if the board of directors did not perform one of the following statutory obligations:

• the obligation to administer the financial condition of the legal entity and to keep the books, records and other data carriers for seven years; or
• the obligation to publish the annual accounts within 13 months of the end of the financial year and within eight days of their adoption, together with a copy of the annual report and certain other financial information.

Any immaterial omission shall not be taken into account – for example, the publication of the annual accounts a few days after the day on which they were due to be published.

If it is found that the board of directors performed its duties improperly and it is presumed that this improper performance constituted an important cause of the bankruptcy, a director can still provide evidence to the contrary with respect to the causal relationship between the improper performance of duties and the important cause of the bankruptcy – for example, by demonstrating that other important causes led to the bankruptcy and that the improper performance of duties did not contribute to these causes. In any case, a director shall not be liable if he or she proves that the improper performance of duties was not attributable to him or her and that he or she was not negligent in taking measures to prevent the consequences thereof.

In D Group the trustee believed that the board of directors was in breach of both statutory obligations, but these were found to be immaterial. However, the trustee successfully proved that the board of directors of one of the Dutch subsidiaries had performed its duties improperly and that this was an importance cause of the bankruptcy. The improper performance of duties consisted of the transfer of real estate for a price materially below market value. This resulted in a significant amount of money no longer being available for a restructuring.(4)

Comment

The consequences of liability on the basis of Section 2:248 can be significant for a director, as the liability is not limited to the damages caused by the improper performance of the duties of the board of directors. The directors are liable for the liabilities of the bankrupt estate, which may well exceed the actual damages. However, the court may reduce the amount for which the board of directors or an individual director is liable – for example, on the basis of:

• the nature and seriousness of the improper performance of duties;
• the other causes of the bankruptcy; or
• the time for which a director had been in office when the improper performance of the duties took place.

For further information on this topic please contact Oete Vonk at NautaDutilh by telephone (+44 20 7786 9100), fax (+44 20 7588 6888) or email ([email protected]).

Endnotes