Mike van de Graaf September 12 2017 Supreme Court rules on whether ultimate director can limit liability through foreign legal entity director AKD | Litigation - Netherlands Mike van de Graaf Litigation IntroductionPersonal tortious liability for acts committed in course of operating companyLiability mechanism: an international contextCommentIntroductionUnlike in many other jurisdictions, it is possible under Dutch corporate law for a foreign legal entity to be appointed as a statutory director of a Dutch legal entity. Therefore, a natural person can act as a director of a legal entity which in turn acts as a director of another company.In order to prevent the ultimate directors (ie, natural persons) from hiding behind these legal entities in case of a claim (ie, for prejudice to creditors or improper management), Article 2:11 of the Civil Code provides that "any legal person which, at the time the liability arose, was an officer or director of another body corporate, shall be jointly and severally liable with that body corporate for its liability". This article was introduced to ensure that the ultimate directors can be held liable, regardless of the length of the chain of legal entities.A number of Supreme Court cases have examined whether it is possible for an ultimate director to limit his or her liability by way of a foreign legal entity director.Personal tortious liability for acts committed in course of operating company According to Dutch legislative history and case law, Article 2:11 redirects all forms of directors' liability based on Book II (Legal Persons) of the Civil Code. This includes liability on the basis of Articles 2:9 (ie, improper management)(1) and 2:138/248 (ie, bankruptcy of a legal entity caused by mismanagement).(2) Dutch literature and lower case law has, for some time, examined in detail whether Article 2:11 also applies to second-level directors' liability on the basis of Article 6:162 (ie, an unlawful act), as neither the text nor Article 2:11 confirm whether the latter is applicable merely to certain legal grounds of directors' liability.(3)In Leroux, the Supreme Court confirmed the applicability of Article 2:11 in case of a tort.(4) According to the Supreme Court, Article 2:11 is applicable in all cases where a legal entity director is liable based on the law, which also includes liability of a legal person director based on:a tort (Article 6:162); oran unlawful dividend distribution (Article 2:216).In the end, this liability lies jointly and severally with every ultimate director. Thus, to establish the liability of a director of a legal person director, the creditor has no additional requirement to assert and prove that serious blame can be personally attributed to the legal person director. However, according to the Supreme Court, it follows from the nature of directors' liability under Article 6:162 that if a legal person director is liable on that basis, the ultimate natural person director can still avoid liability based on Article 2:11 (in conjunction with Article 6:162) if such director can prove that he or she cannot be personally blamed for the mismanagement and behaviour on which legal entity director's liability is based.Liability mechanism: an international contextThe mechanism of Article 2:11 applies not only to all legal entities governed by Book II of the Civil Code, but also to societas Europaeae (ie, European societies) and societas cooperativa Europaeae (ie, European cooperative societies). In light of this, important questions are whether:Article 2:11 also applies to foreign legal entity directors of Dutch companies; andif so, which jurisdiction determines the liability of the ultimate directors in situations where both the foreign legal entity director and the ultimate director may be held liable.On further examination of relevant Dutch case law, the risk of being held liable as the ultimate director can arguably be mitigated by using a foreign legal entity as a statutory director of a Dutch legal entity.In D-Group Europe/Schreurs qq, the Supreme Court ruled that a foreign legal entity, as a director of a Dutch legal entity, may also be held liable pursuant to Article 2:11.(5) However, in Van der Meer qq/Pieper, the Supreme Court stated that the internal relationship between the liable foreign legal entity and its director is regulated not by Dutch law, but rather the law of the country in which the foreign legal entity is established.(6)CommentIn today's economy, it is important to consider the potential consequences of Article 2:11 by setting up or advising on international legal structures which involve Dutch legal entities. For now, a natural person can mitigate the risk of being held liable as the ultimate director by using a foreign legal entity as the statutory director of a Dutch legal entity.For further information on this topic please contact Mike van de Graaf at AKD by telephone (+31 88 253 50 00) or email ([email protected]). The AKD website can be accessed at www.akd.nl.Endnotes(1) Article 2:9(2) of the Civil Code states that:"Each director shall be responsible for the general course of affairs. He shall be wholly liable for improper management, unless no serious reproach can be made against him, having regard to the duties attributed to others, and he was not negligent in acting to prevent the consequences of improper management."(2) Article 2:138/248(1) of the Civil Code states that:"On the bankruptcy of a company (limited by shares), each director shall be jointly and severally liable to the estate for the amount of the liabilities to the extent that these cannot be satisfied out of the liquidation of the other assets, if the management has manifestly performed its duties improperly and it is plausible that this is an important cause of the bankruptcy."(3) Article 6:162(1) of the Civil Code stipulates that "a person who commits a tort against another which is attributable to him, must repair the damage suffered by the other in consequence thereof".(4) Supreme Court, February 17 2017, ECLI:NL:HR:2017:275.(5) Supreme Court, March 18 2011, NJ 2011/132.(6) Supreme Court, June 21 2013, JOR 2013/238.