The ‘refuting of a presumption’ by directors
Frederik van Beek & Joop Werner | 12 July 2022 | Reading time: approximately 4 minutes
In a bankruptcy, directors can be held personally liable if it appears that they have not performed their duties properly, for example, if they have not complied with their accounting obligations. However, in respect of the liability it is important that the improper performance of duties was an important cause of the bankruptcy. The ruling of the Dutch Supreme Court (Hoge Raad), which we will discuss below, may help directors of a bankrupt company to successfully defend themselves more often against claims from receivers.
In principle, directors of a BV or NV are not liable for the company’s obligations. After all, the director acts on behalf of the company. It is the company that enters into obligations, not the director. However, there are situations in which not only the company but also the director of the company can be liable. One of these situations can occur if a company is declared bankrupt.
The law stipulates that if the board of a bankrupt company has not complied with – in short – the statutory accounting obligation, the board has failed to properly perform its duties. The statutory accounting obligation follows from sections 10 and 394 of Book 2 of the Dutch Civil Code. If it is not fulfilled, the improper performance of duties by the entire board is established. That improper performance of duties is then presumed to be an important cause of the bankruptcy. The idea behind this is that if the board has not complied with the accounting obligation, the board has also not properly performed its duties for the remainder.
The improper performance of duties by the board is therefore established in the event of a breach of the accounting obligation. This improper performance of duties can no longer be refuted by the board. That the improper performance of duties is an important cause of the bankruptcy is only a ‘presumption’. The board can ‘refute’ that presumption. In order to do so, the director concerned has to make it plausible that not the improper performance of duties but other facts or circumstances (such as an economic crisis) have been an important cause of the bankruptcy.
A trustee in bankruptcy may call to account the director of a bankrupt company who has not complied with his accounting obligations. If the director is unable to make it plausible that the bankruptcy was caused by anything other than improper performance of duties, then that director is, in principle, jointly and severally liable for the bankrupt company’s negative balance. It is therefore important for that director to be able to refute the presumption of proof. The Dutch Supreme Court recently clarified the framework for this, as the following case demonstrates.
In the case that the Dutch Supreme Court had to rule on, the directors of a private limited company had not complied with their accounting obligations. The receiver saw his chance and held the directors liable for the negative balance of the bankrupt company. According to the Arnhem-Leeuwarden Court of Appeal, the accounting records had contained serious shortcomings for a long time and did not give a correct picture of the accounts receivable, accounts payable and liquid assets. According to the Court of Appeal, failure to meet the accounting obligation meant that improper performance of duties was established. It was therefore up to the directors to refute the presumption that this improper performance was an important cause of the bankruptcy.
The directors concerned argued that one of the directors had transferred almost the entire working capital to himself just before he left the company. That director was also said to have informed all the company’s customers that other directors would be leaving the company. According to the directors concerned, these actions of the departed director should be seen as an important cause of the bankruptcy. Therefore, they felt that they were not liable for the company’s negative balance.
The Court of Appeal did not follow the directors in this. According to the Court of Appeal, “it is impossible to see how a reprehensible action by a co-director could bring about that a fact other than the manifestly improper performance of duties by the board was an important cause of the bankruptcy”.
The Court of Appeal pointed out the entire board’s collective liability. The possible division of liability between them does not affect the bankruptcy trustee’s claim. The directors did not have to put forward another cause for the bankruptcy than the noncompliance with the accounting obligation, but another cause than the improper performance of duties.
Dutch Supreme Court (Hoge Raad)
The Dutch Supreme Court ruled that the Court of Appeal had not applied the correct framework for assessment. According to the Dutch Supreme Court, “also acts or omissions of a director that […] do not constitute improper performance of duties” can be invoked to refute the presumption. The refutation of the evidentiary presumption does not always have to be based on “an external cause”. However, it is important that the actions or omissions of a director that are invoked as an alternative cause of the bankruptcy do not in themselves constitute improper performance of duties. The directors concerned had argued that the withdrawal of the working capital was not an act of management, but an “ordinary” wrongful act.
According to the Dutch Supreme Court, the Court of Appeal wrongly did not examine whether the actions of the departed director were a major cause of the bankruptcy. It is now up to another Court of Appeal to decide this, taking into account the remarks of the Dutch Supreme Court. So there is still hope for the directors concerned.
The discussed ruling of the Dutch Supreme Court offers directors of a bankrupt company more room to refute the presumption that improper performance of duties is an important cause of the bankruptcy. Apart from external causes, the actions of a co-director can also be an important cause of the bankruptcy, provided that these actions do not themselves constitute improper performance of duties. With the Dutch Supreme Court ruling in hand, directors of a bankrupt company may be able to successfully defend themselves more often against claims from receivers. Compliance with the accounting obligation remains of course the best remedy: prevention is better than refutation.
- Ruling Arnhem-Leeuwarden Court of Appeal: ECLI:NL:GHARL:2019:7801
- Ruling Dutch Supreme Court: ECLI:NL:HR:2021:1099
This article was previously published on the Accountant.nl website.
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