Directors liable for unlawful dividend distribution

The Dutch bank demanded joint and several liability from a third party for financing acquired by a company. The company itself could not repay the bank for the financing at the agreed time. The third party then distributed practically its entire capital as a dividend to the shareholders, which meant that the bank could not recover its claim from this third party. The bank subsequently held the directors of that third party accountable for the repayment. Dutch corporate lawyer Sander Schouten explains how the court reached its ruling in this case.

Dutch Court: knowledge of disadvantage

According to the court it was clear in this case that assets The assets of a Dutch company reflect the value of all that the company possesses
» Meer over assets assets of the third party were substantially decreased by the dividend distribution. The court also found that the directors of this third party were aware of the fact that the company that had applied for the credit could no longer repay the bank. For that reason in the opinion of the court the directors of that third party should have taken into account that they would be held accountable by the bank. The court therefore finds that there was knowledge of disadvantage. ‘Should have known’ (objectified knowledge) would in this case also have been sufficient.

Unlawful act by third party

Previous case law developed a standard that states that directors executing a dividend resolution can be liable for the loss of a third party if the company has to take into account that (after distributing the dividend) the company can no longer fulfil its obligations. According to the court this standard was violated in this case. The dividend distribution was practically equal to the entire reserves of the company, so its debt recovery position was severely compromised. Because, in the opinion of the court, the directors should have known that the bank could turn to their company for repayment of the credit, the court found that under these circumstances the execution of the dividend resolution was unlawful.

Loss for the bank equal to dividend distribution

In this case the loss for the bank was equated with the amount of the dividend distributions. This ruling means that the bank can recover its claim from the directors of that third party that distributed practically all its assets as dividend. Therefore, dividend distributions that result in a company’s inability to fulfil its obligations can be considered unlawful under these circumstances. This applies all the more if the directors executing the dividend resolution knew, or should have known, that a consequence of the dividend distribution could mean that the company could no longer pay its debts. In such a case directors’ and officers’ liability is a real risk.

AMS Advocaten specialised in shareholders conflicts

In such cases the shareholders are often the parties profiting from dividend distributions. However, under certain circumstances the shareholders can also be held accountable for an unlawful act. If the shareholders are liable, the resolution of the shareholders that resulted in dividend distributions can also be considered unlawful. If a dividend distributions disadvantaged the creditors of a company, there can be both directors’ and officers’ liability and shareholders’ liability. In such a case the shareholders should also know about the disadvantage.