The director is liable because of a rash transfer of management

As an indirect director, you may be held liable for having “transferred” the company’s board to a subsequent indirect director who was insufficiently screened. Recently, the Arnhem court of appeal ruled in this respect. 

My office colleague Joop Werner already described in an earlier column that a director and major shareholder is obliged to carry out an investigation, and that he may be held liable as director because of the sale of the shares to a fall guy [katvanger]. It also appears from a recent ruling from the Arnhem-Leeuwarden Court of Appeal (confirming the Court’s judgment) that an indirect director too is obliged to carry out an investigation, and that he may be liable as director because of the transfer, whether or not temporarily, of a company’s indirect board.

The case
The director concerned, called “X”, was an indirect director and minority shareholder of a firm of fitters via a management-B.V. in which he held all the shares. This firm of fitters, called “Technia”, was a B.V. with a turnover of € 1,328.579 in 2012 and a workforce of thirteen staff members on average in 2013. Having been the indirect sole shareholder of Technia for almost 10 years, X held indirectly 49% still of the shares in the company at the end of 2012.

Also due to health problems, X transferred the board of his management-B.V. to third parties he got in touch with through a consultancy firm. These successive directors then became Technia’s indirect directors. Briefly put, the new directors made a mess of it and committed malpractices, after which Technia went bankrupt on 22 January 2014.

Liability in the bankruptcy proceedings
In bankruptcy proceedings, a director is liable for the entire shortfall of assets if he “performed his duties improperly and if it is plausible that this is an importance cause of the bankruptcy”. In general, this is the case if “under the same circumstances, no reasonable director had acted in the same way”.

On the demand of the trustee in bankruptcy, the court held X liable, in addition to the new directors, for the entire shortfall of assets because of a manifestly improper performance of duties, in particular because X transferred the board of his management-B.V. to natural persons and legal entities without carrying out a sufficiently thorough investigation into the integrity, financial background and know-how of these natural persons and legal entities.

Insufficient investigation
In the appeal, X put forward that by calling in the consultancy firm which, in his opinion, is a professional consultancy firm, he fulfilled his obligation to investigate. The court of appeal did not concur and confirmed the court’s ruling. The court of appeal held to this purpose that, in view of Technia’s size, at the transfer of the indirect board of Technia, X could have been expected to carry out sufficient investigation into the possibly new, whether or not temporary, interim directors. According to the court of appeal, X has not acted as a reasonable director by calling in the consultancy firm concerned and relying on the advice from the persons concerned, without thoroughly checking the backgrounds of this consultancy firm and these persons. Although not specifically considered, another factor may be that it appeared from the commercial register of the Chamber of Commerce that less than a year before the change in the board, the consultancy firm started as a one-man business and subsequently continued as a B.V. acting under the same name a bit more than one month before the change in the board.

In view of a proper investigation, the court of appeal considered it insufficient that X only visited the consultancy firm’s website, consulted the internet via general search engines and collected references from one person. For that matter, also a subsequent investigation carried out by Hoffman Bedrijfsrecherche showing very few results did not change the court of appeal’s view, since it appears from the report that the assignment for this investigation was restricted and the investigation itself was superficial.

Insufficient consultation
In addition to an insufficient investigation, the court of appeal mainly blamed X for not having consulted at all the majority shareholder in Technia, the accountant or the bank. For example, a few days before the change in the board, X had a meeting with the majority shareholder without mentioning the change in the board, the accountant discovered the change in the board by chance (after which the accounting firm, by the way, terminated the cooperation) and also the bank, being an important financier of Technia, was not consulted on or informed of the change in the board.

Conclusion
The conclusion drawn from the above is that X manifestly performed his duties improperly by transferring the board to a third party in a hurry and without sufficient investigation, enabling this third party to commit malpractices. Since this was an important cause of Technia’s bankruptcy, X may be held liable for the entire (!) shortfall of assets. A little comfort for X could be that also the new directors are jointly and severally held liable in that sense, although it appears from the ruling that it is probably impossible to trace these natural persons and legal entities or that these offer any recourse.

It is still striking (as also stated in the column mentioned above) that X is held liable as director for actions which, in the first place, relate to a shareholder’s actions, namely appointing a new director and a new indirect director without sufficient investigation and consultation (after all, in the case of a B.V., it is not possible that as a director not being also a major shareholder, you appoint your successor).

The lesson to be drawn from this ruling is that, in addition to directors selling their shares in their capacities as shareholders, also indirect directors appointing a new indirect director in their capacities as indirect shareholders, must take into account the directors’ liability in bankruptcies.

If you have any questions as a result of this article, please contact mr. R. (Ramses) de Leeuw.

This article has already been published on the website www.accountant.nl

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