Recently the Minister of Justice issued a draft bill which, if enacted, will introduce a directorship disqualification order under civil law. The bill is open for consultation until 31 May 2013.
The aim of the directorship disqualification order is to prevent fraudulent directors from continuing their activities via new legal entities after being declared bankrupt. A disqualification order would prohibit an unfit director from serving on the management board or supervisory board of a Dutch legal entity or a foreign legal entity registered in the Netherlands for a maximum period of five years.
A directorship disqualification order can be sought by the Public Prosecution Service or the liquidator. The director may contest the order in a regular adversarial procedure.
A disqualification order can be sought for (i) directors and actual executives of Dutch legal entities and/or foreign legal entities listed in the trade register in the Netherlands and (ii) individuals engaging in commercial activities while practising a profession or running a business (one-man businesses). It may also be sought for executive and non-executive directors on a one-tier board.
Indirect directors are also included. Hence, a disqualification order may be imposed on a foreign indirect director of a Dutch company at least insofar as he is the first foreign director in the chain.
The question arises whether disqualification orders can be imposed on foreign directors further up the chain, as they are not subject to the provisions of Dutch company law, regulating the relationship between directors and companies. The relationship between these directors and the company is governed by the law under which the company was incorporated.
It could be argued that a disqualification order does not regard the internal relationships between a foreign company and its director but is intended for all directors of Dutch companies, indirect and otherwise, regardless of their country of residence.
A disqualification order can be imposed if a director has proven unfit during the three years prior to the bankruptcy. The bill cites five examples (non-exhaustivily):
- If the criteria for director’s liability in bankruptcy are met;
- If the legal entity has engaged in nonobligatory legal acts to the serious detriment of its creditors and these acts have been subsequently been annulled by the liquidator;
- If the director, despite a request from the liquidator, falls seriously short in the discharge of his information and cooperation obligations under the Dutch Bankruptcy Act (Faillissementswet);
- If in the three years prior to the bankruptcy, the person in question, acting as a director or a natural person while practising a profession or running a company, has been involved twice in a bankruptcy;
- If the director or legal entity has been fined because (i) tax returns were deliberately falsified, (ii) a tax demand was too low as a result of intent or (iii) tax returns were not submitted within the allotted time.
A director can exculpate himself by showing that he is not to blame for the alleged mismanagement and that he has not been negligent in taking appropriate measures to avert the consequences thereof.
A disqualification order prohibits a director from serving on the management board or supervisory board of a Dutch legal entity or a foreign legal entity registered in the Netherlands for a maximum period of five years. Nor can he serve as an executive or non-executive director on a one-tier board.
Another consequence of the disqualification order is that, unless otherwise determined in the court order, the individual in question may no longer continue as director or supervisory director (or executive or non-executive director on a one-tier board) of other legal entities. These other legal entities, given the potential consequences, may present their own view. Accordingly, the Public Prosecution Service and/or the liquidator will hand over a list of the legal entities of which the individual is a director.
The court may decide at any point in the proceedings to suspend the director and, if necessary, appoint temporary directors to the management or supervisory board if requested to do so by the Public Prosecution Service or the liquidator.
Dismissal or suspension is recorded in a public register. The Minister of Justice has expressed a wish that - eventually - this information may be exchanged at a European level.
If the bill is enacted, the question arises whether disqualification orders will be sought (and imposed) on a regular basis. Thusfar the Public Prosecution Service has paid very little attention to combating bankruptcy fraud, despite various initiatives to that effect. It is far from certain that the availability of a disqualification order will change this.
Liquidators will and should ask themselves how far the collective creditors (for whom they are required to liquidate the bankrupt’s assets) would benefit from a demand for a disqualification order.
Liquidators are likely to combine this request with a mismanagement claim. In no-asset cases a liquidator can acquire a guarantee for such procedures under the Guarantee Scheme for Liquidators (Garantstellingsregeling Faillissementscuratoren). One of the conditions is that the director has sufficient assets to take recourse against. However, as there is often not the case, a guarantee would offer a solution.
It therefore remains to be seen whether liquidators will demand a disqualification order in such cases. The proposed legal obligation imposed on liquidators to combat bankruptcy fraud is unlikely to change this situation.