Director liable after bankruptcy due to manifestly improper management

In a recent case that came before the Court of Appeal in Den Bosch, a large number of themes concerning directors’ liability in bankruptcy were addressed. Corporate lawyer Sjoerd Yntema discusses this fascinating case.

The facts

40% of the share The portion of registered capital of a private or public limited company
» Meer over share shares of the INO company were held by holding company Y. This holding company was the sole director of INO. The sole shareholder and director of the holding company was Mr Y. The holding company also had interests in other companies, all of which were involved in software design and technology. The holding company was also director of these companies.

INO acted as project coordinator in projects of these companies and in that capacity distributed subsidies of the European Commission among the other companies. After audits revealed irregularities with these subsidies, the commission recovered a large amount, resulting in INO being declared bankrupt on 15 October 2013. Mr Y was sentenced for his actions under criminal law.

First instance

The bankruptcy trustee held Y and his holding company liable. The District Court ruled in the first instance that they were jointly and severally liable for the shortfall of assets The assets of a Dutch company reflect the value of all that the company possesses
» Meer over assets assets pursuant to Section 248 of Book 2 of the Dutch Civil Code (DCC). Y and his holding company have appealed against the judgment.

Appeal

The Court of Appeal is of the opinion that as director, the holding company (and consequently Y) did not comply with his obligations to publish the annual accounts in time (pursuant to Section 394 of Book 2 DCC) and that it has therefore been established that Y fulfilled his duties as director in a manifestly improper manner within the meaning of Section 248(2) of Book 2 DCC. This also creates an evidentiary presumption that the improper performance of duties (which has thus been established) was an important cause of the bankruptcy. It is then up to the director to refute this evidentiary presumption.

Evidentiary presumption not negated

According to the Court of Appeal Y did not succeed in doing so, because it did not appear that the administrative office that kept the accounts did not file the annual report in time out of spite, as Y had claimed. Publication remains the responsibility of the management, according to the Court of Appeal. Holding company Y has not succeeded in demonstrating that facts and/or circumstances other than the manifestly improper performance of duties as a director have been an important cause of the bankruptcy.

Manifestly improper management

The Court of Appeal held that the holding company had allowed Y to withdraw substantial amounts from INO and that no right-thinking director would have allowed this. According to the Court of Appeal, this is even more important in the situation that INO urgently needed the liquid assets for its business operations. The Court of Appeal therefore assumes that this was also an important cause of the bankruptcy, which leads to manifestly improper management pursuant to Section 248(1) of Book 2 DCC.

Finally, the Court of Appeal sees no grounds for mitigation within the meaning of Section 248(5) of Book 2 DCC and concludes that the contested judgment will be upheld.

Conclusion

Although the outcome of these proceedings is harsh for the indirect director Y, this judgment nicely shows the dynamics of directors’ liability in bankruptcy. The lawyers of AMS Advocaten act as trustees in bankruptcies, but also assist directors who are held liable for a shortfall in the assets in the bankruptcy.