Netherlands: Good Riddance? Duty Of Managing Director To Investigate Third Party Buyer Before He Sells His Subsidiary

Background

On January 25, 2012, the District Court of Amsterdam ("Court") ruled on grounds of managing director's liability towards creditors of an sold subsidiary (LJN BV6199 (Sveba)). This case concerns a dispute between, on the one hand, an electronic wholesale company ("Wholesaler") and on the other hand, mr. B ("B") and Sveba Beheer B.V.("Sveba Beheer") along with B: "Defendants")

B is the sole shareholder and managing director of Sveba Beheer. Until 24 September 2010, Sveba Beheer was sole shareholder and managing director of Sveba Bouwen en Wonen B.V.("Sveba B&W"). On 24 September 2010 Sveba Beheer sold all its shares in Sveba B&W to Vitalis B.V. ("Vitalis"). Sveba Beheer came into contact with Vitalis through an advertisement in a national newspaper.

Between June 2008 and June 2010, the Wholesaler sold and delivered goods to Sveba B&W. After September 2010 (the date of the transfer to Vitalis) the Wholesaler's invoices remained unpaid. Sveba B&W was declared bankrupt on 15 March 2011. The Wholesaler subsequently held Sveba Beheer and B liable for damages on grounds of tort (art. 6:162 DCC) and B as indirect-managing director (art. 2:11 DCC).

The court sentenced Defendants jointly and severally to pay the outstanding invoices to the Wholesaler.

General managing director liability: the Ontvanger / Roelofsen judgment

The Court holds Sveba Beheer liable for the outstanding claims of the Wholesaler. The Court hereby states, with reference to the judgment of the Supreme Court, HR 8 December 2006, LJN ZA0758 (Ontvanger/ Roelofsen), that in general it is only then assumed that a director acted unlawfully towards the creditor of the company if (partly due to its obligation to proper performance of his duties referred to in Art. 2:9 BW), a sufficiently serious/severe accusation (voldoende ernstig verwijt) can be made towards him.

According to the Court, such a serious accusation is in any case when it is established that the managing director knew or reasonably should have understood that the conduct of the company, authorized by him, would have the effect that that the company would not be able to fulfill its obligations and that there would be no recourse for the damages occurring as a result.

This managing director's liability test pursuant tothe Ontvanger/Roelofsen judgment is the same test for liability on the grounds of tort (art. 6:162 DCC). In this case, the Court reached the conclusion that there is such a serious accusation and considers the following:

"It must be assumed that defendants carelessly disposed of Sveba B&W by transferring the shares to an unknown company who merely pretended to be a buyer of companies, and that they therefore took the risk that the company would fall into the hands of someone who had no intention of paying any outstanding invoices/debts to the Wholesaler. Having said so, defendants have, with the transfer of the shares, insufficiently paid attention to the interests of the Wholesaler as a creditor of Sveba B&W".

Managing director's Liability under art. 2:11 BW

The Court condemns B on the grounds of Art. 2:11 DCC. According to article 2:11 DCC the liability of a corporation (rechtspersoon) as a managing director of another corporation, lies with any one who at any time of the arising liability is the managing director of this liable corporation. This provision seeks to prevent that a managing director can avoid liability by letting a corporation, controlled by him, fulfill its managing directorship. The liability arising from Article 2:11 BW is liability as a managing director. The basis of liability is not relevant; this can be liability towards the company, towards the estate, or towards creditors.

The breakthrough mechanism of Art. 2:11 DCC

To be able to hold B liable as managing director on the basis of Art. 2:11DCC towards the Wholesaler, Sveba Beheer must first be liable as a managing director-corporation of Sveba B&W. The breakthrough provision of art. 2:11 is applicable only in the case of a corporation as managing director of another corporation.

Sveba Beheer sold its shares in Sveba B&W as a shareholder, not as managing director. This transfer of shares to Vitalis injured the Wholesaler. Sveba Beheer has done nothing wrong as a managing director. It is B, in his capacity of managing director of Sveba Beheer, who made the decision to sell the shares of Sveba B&W to Vitalis. But how can B be held liable, if art. 2:11 DCC only applies if Sveba Beheer had a role as a managing director and not as a shareholder? In other words, how can the actions of Sveba Beheer be condemned as actions of a managing director of Sveba B&W?

The Court refers to the Albada /Jelgersma judgment (HR 19 February 1988, NJ 1988 to 1947). In this case, a parent company was held liable for the debts of her daughter (subsidiary). The Supreme Court ruled that a parent company who is intrusive and interferes intensely with its subsidiary, may be liable towards creditors of the subsidiary if the parent foresaw or ought to see that these creditors were being harmed, even if the parent company was not the managing director of the subsidiary.

In this case the formal managing director of Sveba B&W is Sveba Beheer and the transfer of all shares in a subsidiary to an acquirer (even if it is in his role as shareholder) can also under considerable extent be seen as interfering with the policy of the subsidiary. Therefore It follows that Sveba Beheer has also interfered with the sale of Sveba B&W as a managing director and why subsequently B, through art. 2:11 DCC, can be held liable as managing director of Sveba Beheer.

Conclusion

A managing director – sole shareholder must properly investigate the background and the intentions of the acquirer prior to selling a (subsidiary) company to avoid being held liable as a managing director of a sold subsidiary, by creditors of thesold subsidiary. This liability is possible in the event of insight and control by the parent company regarding the policy of the subsidiary. In that case there is a duty of care by the parent towards the creditors of the subsidiary. This duty of care is violated if facts and circumstances point out that the parent foresaw or at least ought to have foreseen that the creditors' claims could not have been met.

First published in the Kennedy Van der Laan newsletter - July 2012

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