Enterprise Division: The right of investigation is not intended for claims disputes!

Shareholders and other parties entitled to an investigation may arrange for the Dutch Enterprise Division to review the policy and course of affairs of a legal entity. However, as appeared from a recent ruling in the Netherlands, the investigation proceedings are not intended for the settlement of disputes pertaining purely to property law. Corporate Lawyer Onno Hennis explains the ruling.

Dispute with shareholders: Termination of management agreement

The case background is as follows. A financial consultancy performed activities under a management agreement for a number of Dutch companies operating in the construction sector under the name Flextra. Moreover, the consultancy firm was (co-)shareholder in a number of Flextra companies. In the spring of 2015, a dispute arose between the financial consultancy firm and its co-shareholders. The fact is that significant financial irregularities were found at the Flextra companies, which were attributable to (the board of) the consultancy firm. As a result, the management agreement was terminated, and Flextra stated that it had money to claim from the financial consultancy firm. The consultancy disputed that it still owed money.

Suspension of payment and liquidation

Following the termination of the management agreement, the financial consultancy company ran into problems. This was because its (only) source of income had come to an end with the termination of the management agreement. After it had been granted suspension of payment for approximately three months, the bureau was finally declared insolvent at the request of the Flextra companies.

Lawyer requested an investigation

However, just ten days before the liquidation order, the (lawyer of the) consultancy firm asked the Enterprise Division to order an investigation into the policy and course of affairs at the Flextra companies. The financial consultancy’s lawyer had also requested immediate measures to suspend the board of the companies and to appoint an interim director.

Trustee: ‘Proceedings not to continue.’

Having been notified of the liquidation by the Flextra companies’ lawyer, the Enterprise Division offered the trustee the opportunity to take over the proceedings. In the Netherlands, following a liquidation, the trustee will decide whether court proceedings should continue. In this case, however, the trustee informed the Enterprise Division that he did not wish to continue the proceedings.

Request for continuation of investigation proceedings

The Flextra companies then applied for a formal termination of the proceedings by means of the so-called dismissal of proceedings. The trustee declared that he had no objection to the dismissal of proceedings. However, a request was made on behalf of the insolvent consultancy (but not by the trustee) to reject the dismissal of proceedings and to continue the investigation proceedings without cost to the estate.

Dutch court: Interests of the defendant versus the interests of the applicant

In a request for prejudiced right, the court weighs the interests of a defendant who fears that, if the proceedings are continued, any order for costs and expenses to be awarded cannot be recovered from the applicant against the applicant’s interest in obtaining a decision on the dispute.

Interests of the investigation for the financial consultancy

The financial consultancy’s interests were, in its own words, that the investigation proceedings could establish that the claims – which had also formed the basis of the winding-up petition – do not exist (any longer). The firm’s lawyer further argued that the requested investigation could also establish that it was precisely the companies that still had to pay money to the financial consultancy.

Enterprise Division’s opinion on the right of investigation

The Enterprise Division did not agree with the consultancy firm. It stated first and foremost that the right of investigation is not intended to establish the existence of the claims made. In the Netherlands, investigation proceedings are used to determine whether there has been mismanagement by means of an independent investigation once it has been established that there are justifiable reasons to doubt the correctness of policy. The Enterprise Division considered that, although the investigation could clarify the status of the claims, their determination, as the firm had been placed into liquidation, could only be made through the validation procedure.

Appeal against liquidation order instead of investigation proceedings

The financial consultancy appeared to have chosen the wrong arena for the dispute. The argument that the Flextra companies’ claims did not exist and that the consultancy firm itself had a claim, should have been raised in the event of an appeal against the liquidation order but not in investigation proceedings. The Enterprise Division was, therefore, right to reject the request for continuation of the investigation proceedings without cost to the estate.

Dutch lawyer for assistance with investigation proceedings

Are you a director or (co-)shareholder and involved in investigation proceedings? Or do you wish to submit the policy or course of affairs of a company in which you are a shareholder to the court? The Lawyers at AMS Advocaten have extensive experience in corporate disputes and frequently represent shareholders and directors in the Enterprise Division.