Proper recording of intercompany transactions

Section 247 of Book 2 of the Dutch Civil Code stipulates that there must be a written record of the legal acts between a company and its shareholder. Dutch insolvency law lawyer Hidde Reitsma explains the idea behind this legal provision. He also illustrates by way of a judgement what the consequences could be if this Dutch requirement is not fulfilled.

Why should a legal act between a company and a shareholder be recorded in the Netherlands?

The underlying idea of Section 247 of Book 2 of the Dutch Civil Code is that intercompany legal acts (from one company within a group of companies to another) can sometimes be to the detriment of the company because, particularly in transactions of this kind, the interests of the company are not always paramount. By requiring a written record of these legal acts, a trustee (in bankruptcy) can still establish the content of the legal act afterwards. This is important because a trustee must be able to determine whether the legal act had prejudiced any creditors. If any creditors were prejudiced, the trustee may annul the legal act on the grounds of actio pauliana.

What about the requirement of written records in the Netherlands?

In the Netherlands, a legal act may be annulled by the trustee in favour of the company if there is no written record. This can have major consequences. For example, any delivered goods may have to be returned, and there may be a duty to pay compensation. However, the requirement of written records does not always apply. In the Netherlands, written records are not required for legal acts that fall within the scope of ordinary business operations. Dutch case law stipulates, among other things, that maintaining a regular current account relationship falls under ordinary business operations. This does not necessarily need to be recorded in writing.

Company sells its vehicle fleet to shareholder without a written record

A judgement of the Limburg District Court in the Netherlands in 2014 is a good illustration of the possible effects of Section 247 of Book 2 of the Dutch Civil Code. A company sold its vehicle fleet to its shareholder without making a written record of this sale. Therefore, the trustee was unable to establish whether the transaction had been at arm’s length and whether any creditors had been prejudiced by it. When the company went into liquidation shortly afterwards, the trustee annulled the legal act.

Proper recording of intercompany transactions in the Netherlands

The vehicles had to be returned to the company that originally owned them and compensation had to be paid where this was no longer possible. Therefore, it is essential that proper written records are kept of intercompany transactions in the Netherlands.