Director continues to borrow money from limited company, resulting in inability to pay staff. Does this constitute a legal ground for suspension in the Netherlands?

It is not uncommon for a company to have two directors who are also shareholders. Because resolutions have to be passed by a majority of votes, the risk of a deadlock is ever-present. The suspension of one of the directors can break the deadlock, but how does a suspension work? Dutch corporate lawyer Hidde Reitsma explains.

Request for suspension in interlocutory proceedings

A request for suspension can only be granted by the court if there are sufficient grounds to suspend the director in question. The basic principle is that a legal person and its directors should behave towards one another in accordance with the criteria of reasonableness and fairness (Section 2:8 of the Dutch Civil Code). A director may be suspended if there is a compelling reason to do so and the company cannot reasonably be expected to allow the director to continue his duties.

Deadlock between shareholders

A judge in interlocutory proceedings recently ordered that one of the two directors of a publishing company be suspended with immediate effect. A deadlock had occurred within the company due to the fact that both director-shareholders had equal voting rights. It was therefore not possible to achieve the majority of votes needed to pass resolutions that were put forward by one shareholder, but objected to by the other shareholder. Director-shareholder B (hereinafter: director B) wanted to break this deadlock by having director A suspended as a director. He initiated interlocutory proceedings.

Serious administrative backlog

What was the background to this case? Both directors were in the habit of making monthly withdrawals from the business account in addition to their salaries, as if it were a current account relationship. At a certain point, director B noticed the disproportionate number of withdrawals being made in comparison to the company’s liquid assets The assets of a Dutch company reflect the value of all that the company possesses
» Meer over assets assets. In addition, significant tax liabilities had arisen due to a serious backlog in the company’s financial administration.

Demand to cease withdrawals

Director B immediately stopped making the informal withdrawals, but director A did not take the matter too seriously and simply continued. A warning issued by director B for director A to cease the withdrawals and to supply funds to reduce the current account debt had no effect. Matters even got to the stage that the company was unable to pay its employees after director A had made additional withdrawals in a specific month.

Lawyer: “Business is financially sound”

During the proceedings, the lawyer representing director A argued that the company was financially sound enough to allow for the withdrawals from the current account. However, the judge in interlocutory proceedings took an entirely different view, as did director B. It was established that the company had large debts and hardly any cash. The financial position of the company did not allow for the continuous (not contractually regulated) withdrawals.

Director failed to change pattern of withdrawals

The judge blamed director A for seemingly failing to understand or acknowledge the gravity of the situation. When confronted with the obvious imbalance between the firm’s financial position and the current account debt, director A did not change the pattern of his withdrawals. The judge considered this in itself sufficient reason for the company to no longer allow him to perform his management duties.

Neglect of management duties: suspension

Additionally, director A had been responsible for the timely provision of financial and administrative documents to the accountant. He seriously neglected this duty, which meant that for a long time the financial position of the company was obscure and the current problems were able to develop. The request for suspension of director A was therefore granted by the court. However, the measure is temporary, that is until 30 June 2019 or as much earlier as the Enterprise Division has pronounced judgment (in inquiry proceedings yet to be initiated).