10 July 2024

Directors’ liability: ‘de facto director’

By Joris Groeneveld

Dutch companies such as B.V.'s have their own legal personality and independently carry their rights and obligations. Directors can only be held personally liable for the debts of a B.V. under special circumstances.

De facto directors are persons who are not directors according to the company’s articles of association, but who do in fact control the company. They too can be held liable under certain circumstances. The Dutch Supreme Court (‘Hoge Raad’) gave an interesting ruling on this last year. In this blog you can read more about the so-called ‘Red Dragon’ judgment.

The case

This case revolves around the bankruptcy of Red Dragon B.V. The purpose of this company was to operate a large all-you-can-eat restaurant in the town of Duiven. The construction of the restaurant required financing. Rabobank was willing to provide an amount of €3.1 million, under the condition that Red Dragon would also invest €4.9 million in the property from its own resources. To prove this, Rabobank asked for evidence. Red Dragon sent invoices from a construction company and bank statements to Rabobank. Afterwards, these documents turned out to be forged; Red Dragon had never incurred these costs.

Red Dragon opened its doors in May 2015 and was declared bankrupt in December 2016. There was a large bankruptcy deficit. The deception described above should usually be sufficient to sue the company’s responsible board members for improper performance of duties (see also our website page on directors’ liability). However, the person who falsified the invoices and bank statements and misled Rabobank was not a director at the time. The main discussion in these proceedings concerned whether or not this person could be held liable as a de facto director.

When is someone a de facto director?

The law states: ‘The person who has determined or co-determined the policy of the company, as if he were a director, is equated with a director.’ (section  2:248 paragraph 7 Dutch Civil Code). In the parliamentary history, the legislator comments further on this provision of law. There it is stated that for a de facto director to be liable, it is required that ‘the formal board has effectively been set aside’. Until the Red Dragon ruling, there was debate among legal authors about the interpretation of this criterion. Broadly speaking, the camps could be divided into supporters of the “narrow interpretation” and the “broad interpretation” of the criterion.

According to supporters of the narrow interpretation of the criterion, a de facto director could only be held liable if the statutory (formal) board had been fully set aside. The de facto policymaker is then the only one who assumed the management duties.

According to supporters of the broad interpretation, de facto directors can also be held liable when they acted alongside the formal board. The statutory board then tolerates the de facto policymaker, and they run the company together.

Supreme Court creates clarity

In this case, the attorney on the policymakers’ side argued, of course, for the narrow doctrine. Their criticism of the prior ruling, in which the policymaker was also found liable, was that the previous court had not assessed whether the statutory board had also been governing Red Dragon besides the policymaker, even though the legislative history would suggest that this is relevant.

The Supreme Court rejected the narrow interpretation in its ruling. It put first and foremost that the question whether someone has determined (or co-determined) the policy as if he were a director (within the meaning of section 2:248 paragraph 7 of the Dutch Civil Code) depends on all circumstances of the case. According to the Supreme Court, the criterion of  ‘setting aside’ from the legislative history does not imply “that the actual policymaker must have managed the company instead of and to the exclusion of the statutory board”. ‘Setting aside’ does mean, however, that the actual policymaker must have appropriated at least part of the management authority, and in this way determined or helped determine the policy as if he were a director. This may also be the case if, in addition, the statutory board continued to perform their duties as directors at the same time.

This doctrine is not only relevant to directors’ liability in bankruptcy but also applies in other areas of company law, where de facto directors are equated with formal directors. Furthermore, established case law indicates that they can also be held liable outside of bankruptcy on grounds of tort.

More information

Do you have any questions arising from this blog, or would you like advice on this topic or on other company law issues? Please use the details below to contact me. I will be happy to assist you.

Joris Groeneveld

Joris Groeneveld

Lawyer

Joris is a lawyer within the corporate and insolvency law practice.

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