Netherlands Update: Liability of the (director) major shareholder due to the transfer of shares; ‘a short internet search could have been sufficient’

Recently, the District Court of Amsterdam ruled that a (director) major shareholder was liable in connection with the failure to comply with his duty to investigate the sale/transfer of a company.

As a (director) major shareholder, you cannot simply sell your company without first doing a thorough investigation into the intentions of the buyer. This also applies if the buyer is a (friendly) relationship and in particular with the sale / transfer of a company in financial need.

Background

What had happened? In 2018 and early 2019, a director-major shareholder (hereinafter referred to as: DGA) concluded several lease contracts on behalf of his B.V. (hereinafter referred to as: the BV) with leasing company Hiltermann Lease B.V. (hereinafter: Hiltermann Lease) with regard to passenger cars.

At the beginning of 2019, however, the BV ran into financial problems and lease terms were no longer paid. Hiltermann Lease then terminated the contracts and sent final invoices to the BV.

In the meantime, the DGA went looking for a buyer for the BV, and Mr. A, the supplier of the BV, was willing to do so. On 11 November 2019, the shares were transferred and the DGA resigned as a director.

After this, it went fast. Mr. A liquidated the BV by means of turbo liquidation; he emptied the company even before the liquidation procedure (read: (partial) payment of creditors) could take place. As a result, no assets were present, the BV ceased to exist on 1 January 2020.

Hiltermann Lease was therefore left with unpaid invoices. Since the BV no longer offered any recourse, it held the DGA liable for this.

The subdistrict court considered that the sale of the shares is not an act of the board, but a shareholder decision. The fact that the DGA was also a director did not matter. This meant that the strict criterion of directors’ liability, ‘a personal serious reproach’, did not apply. For liability of the shareholder, ‘only’ it was required that the shareholder acted unlawfully.

Excursion: shareholder liability

Our law has three categories of shareholder liability. First of all, the situation in which a shareholder (read: the parent company) abuses the identity difference between two companies and creditors are thereby disadvantaged. In such a case, the creditor can recover the entire debt from the assets of the shareholder (read: the parent company).

In the second category, a major shareholder (read: a shareholder with predominant control) has raised certain expectations that the company cannot meet or does not intervene, while it was clear that the company would not be able to meet its obligations to creditors. The shareholder can then be held liable.

Finally, there is the (classic) example of the major shareholder (read: a shareholder with predominant control) who is (actually) in charge. He is actually the director (read: director) of the company. If the company then leaves debts unpaid, it can be held liable for this. The case discussed here fits best within this last category.

Back to the judge’s verdict. According to the subdistrict court, Hiltermann Lease had put forward sufficient facts and circumstances to conclude that the DGA had acted unlawfully towards the bv’s creditors in the transfer of shares.

It was important that the DGA had failed to properly investigate Mr. A’s intention, in order to find out whether he actually wanted to continue the company. This was especially true because the company – due to the supply of poor quality products from Mr. A – had a claim hanging over its head and the shares had been sold for one euro. Had the DGA done a simple internet investigation, he would have found out that Mr. A had (been) involved in several bankruptcies, according to the subdistrict court.

In view of these circumstances, according to the subdistrict court, the DGA had deliberately taken the risk that the BV would not pay its debts to Hiltermann Lease. The subdistrict court, therefore, ordered the DGA to pay compensation for the damage caused by Hiltermann Lease.

Similar statements

A similar case occurred in 2012 at the District Court of Middelburg. Here, however, the judge chose the path of directors’ liability.

The plaintiff had concluded two lease agreements with the BV, but due to the poor financial situation at the BV (and its subsidiaries), no lease terms were paid anymore. Defendants, including the DGA, sold the BV without investigating the buyer. Salient detail: the buyer had also not conducted any research into the company.

The subdistrict court ruled that in view of the fact that the BV had been emptied immediately after the transfer of shares, the defendants had acted unlawfully towards the plaintiff by not investigating the buyer. Here too, the subdistrict court considered that if the defendants had done a simple internet investigation, they would have found out that the buyer had been involved in dubious practices. According to the court, by selling the company without doing any research, they had consciously taken the risk that the BV would not be able to pay its debts to the plaintiff. The defendants were therefore held personally liable for the damage.

In another case before the District Court of Amsterdam, a DGA was faced with the question of liquidating the company or selling it. Following an advertisement in a national newspaper, the DGA then sold the subsidiary to a BV buyer.

Here too, the court ruled that the defendants had transferred the shares without doing any investigation and they had, therefore, made no effort to verify whether it was the buyer’s actual intention to continue the business, or to liquidate it, thereby harming the creditors. In doing so, they had consciously taken the risk that the company would end up in the hands of someone who did not intend to pay the debts. According to the court, they had therefore insufficiently taken into account the interests of the creditor.

Finally

The above cases show that a (director)-major shareholder can also be held liable for the disadvantage of creditors. This is an exception to the rule that a shareholder is not liable for debts of the company.

The advice is therefore as follows: as a (director) major shareholder, always take into account the interests of creditors and, when making a sale, investigate the person who wants to buy the company.

By Thomas Been, Hocker, Netherlands, a Transatlantic Law International Affiliated Firm. 

For further information or for any assistance please contact netherlands@transatlanticlaw.com

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