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Directors ’ Liability in Insolvency: t he Dutch Perspective

This presentation provides an overview of directors' liability and duties in insolvency cases from the Dutch perspective. It covers topics such as improper management, behavior of directors in the vicinity of insolvency, disqualification of directors, and more.

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Directors ’ Liability in Insolvency: t he Dutch Perspective

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  1. DrJoti Roest Directors’ Liability in Insolvency:the Dutch Perspective Riga - March 10, 2017

  2. Outline • Some general remarks on directors’ liability, directors’ duties and board structures. • Overview of directors’ liability claims in insolvency. • (Manifestly) improper management of directors caused insolvency. • Behaviour of directors in vicinity of insolvency (‘the twilight zone’). • Disqualification of directors. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  3. Directors’ liability in insolvency • Claims are primarily based on civil law, provisions in book 2 Dutch Civil Code [DCC] (legal persons) and based on wrongful act (tort), book 6 DCC (law of obligations). • Criminal sanctions and punishment in case of fraudulent bankruptcy, sections 340-344b Dutch Penal Code [DPC]. • Claims brought by liquidator (‘curator’) and (individual) creditors. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  4. Board structure • Most common: two-tier structure: management board and (optional) supervisory board. • Since 2011: one-tier board has legal basis in 2:129a/239a DCC. • Focus on liability of directors of the two-tier management board. Members of supervisory board may be liable in case of improper supervision. • Dutch company law contains provisions on liability of de facto directors. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  5. Board structure • Legal person may be appointed as (sole) director, but: • In case of (directors’) liability of a director-legal person: its (indirect) directors-natural persons are jointly and severally liable, art. 2:11 DCC. • Focus on private limited liability company (Dutch ‘beslotenvennootschap’). Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  6. Director’s duties • Section 2:9 DCC: each director has the obligation towards the legal person (company) to perform his duties properly, so • he has to perform his duties to the best of his ability. • The performance of directors’ duties is a collective responsibility of members of the management board. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  7. Overview of directors’ liability claims • Insolvency of the company is caused by improper management. • Behaviour of directors in the vicinity of insolvency. • Fraudulent transfers (asset shifting). • Wrongful trading. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  8. Mismanagement caused insolvency • (General) liability for mismanagement (2:9 DCC) • Director liable in case of improper management, which can be attributed to him because of serious blame. • Causation between improper management and damages of the company. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  9. Mismanagement caused insolvency • Directors are jointly and severally liable, unless exculpation of an individual director. • Liability to the company, but in insolvency, the liquidator brings the claim. • Payment of damages to the company and in insolvency: to the bankruptcy estate. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  10. Mismanagement caused insolvency • Liability for mismanagement in insolvency (2:248 DCC): • Director is liable in case of manifestly improper management. • In the three year period prior to the opening of insolvency proceedings. • Manifestly improper management is an important cause of the bankruptcy. • Directors are jointly and severally liable for the full deficit in bankruptcy, unless exculpation. • Only liquidator can file the claim. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  11. Mismanagement caused insolvency • Statutory presumptions in case directors failed to make annual accounts public in time or neglected bookkeeping duties (2:248 (2) DCC). • Irrefutable presumption of manifestly improper management, and refutable presumption that this management is an important cause of the bankruptcy. • Director has to show that insolvency was caused by other (external) circumstances not attributable to the management board. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  12. Behaviour of directors in the vicinity of insolvency: fraudulent transfer • General meeting decides on distribution of dividends, but: • Approval needed by management board (distribution test) (section 2:216 (2) DCC). • The management will not approve of a distribution when they know/should have known that the company, after the distribution, shall not be able to continue to pay its debts as they fall due. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  13. Behaviour of directors in the vicinity of insolvency: fraudulent transfer • In case of approving an unlawful distribution, directors are jointly and severally liable for damages caused by the distribution, 2:216 (3) DCC. • Liability to the company, in case of insolvency the liquidator brings the claim. • [Liquidator may also base his claim on 2:9, 2:248 DCC or on wrongful act (tort), 6:162 DCC.] Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  14. Behaviour of directors in the vicinity of insolvency: fraudulent transfer • Directors engage in transactions with shareholder(s) or other parties (creditors), f.e. • Selective payments. • Individual creditors can bring a claim based on wrongful act (tort), 6:162 DCC as the directors neglected their duties to the creditors. • Liquidator can bring a claim based on wrongful act (tort) in case the damages are suffered by the creditors collectively. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  15. Behaviour of directors in the vicinity of insolvency: wrongful trading • Dutch law does not contain a specific provision aimed at preventing wrongful trading. • Liability of directors is based on wrongful act (tort), 6:162 DCC. Landmark-case: Beklamel. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  16. Behaviour of directors in the vicinity of insolvency: wrongful trading • Dutch Supreme Court (Beklamel): a director who, on behalf of the company, accepts an obligation while he knows/should have known that the company will not be able to fulfil that obligation timely, nor be able to offer sufficient recourse, is personally liable to the creditor. • In case a creditor is able to prove this, the director can be seriously blamed for violating a duty of care to the creditor who did not receive payment. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  17. Behaviour of directors in the vicinity of insolvency: wrongful trading • ‘Beklamel-claims’ are very common: abundant amount of case law, so directors are very aware of the risk of personal liability, so: • Beklamel-claims are a strong incentive for directors to file for bankruptcy timely or seek advice on the possibility of restructuring. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  18. Disqualification of directors • July 1, 2016 the Bill on directors’ disqualification entered into force, incorporated in sections 106a-e of the Dutch Bankruptcy Act (DBA). • Director may be disqualified under civil law for a maximum period of 5 years during which he may not act as a director or supervisory director of a legal person (company). Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  19. Disqualification of directors • The (district) court may disqualify a director in case he engaged himself in (i.a.) bankruptcy fraud or if directors’ liability on the basis of section 2:248 DCC has been irrevocably established. • The liquidator (!) (as well as the public prosecutor) can request a directors’ disqualification. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  20. Final remarks • Dutch law contains no provision on wrongful trading, but tort based Beklamel-claims are very common and threatening to directors. • In case of fraudulent transfers (distributions or other transactions [f.e. selective payments]) directors are sued on the basis of wrongful act (tort) by individual creditors and by the liquidator. The liquidator can also file a claim based on unlawful distribution (2:216 DCC). Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

  21. Final remarks • If insolvency of the company is caused by mismanagement of directors, the liquidator will bring a claim based on several provisions (2:9, 2:248 and 6:162 DCC). • The statutory presumptions included in 2:248 are threatening to directors as they shift the burden of proof. • The liquidator may request disqualification of a director. This new ‘tool’ may put pressure on directors during insolvency. Conference on Insolvency Administration's 15th Anniversary, Riga 10-3-2017

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