In a recent ruling, a director of a bankrupt holding company and intermediate holding company was held liable for estate deficits by the liquidator. The director in question built up a significant current account debt with the holding company over four years and used this money for risky investments. Despite the poor financial performance of the operating companies and warnings from the auditor, the director decided to pay another €750,000 to himself as dividends in 2015.
The case
The shares of Repo-Vastgoed BV were held by Holding BV. Holding BV is a holding company, the highest company within a group of companies. A holding company usually secures profits, pensions and other important assets. Should an operating company run into financial difficulties and go bankrupt, the valuable assets in the holding company remain protected and fall outside the bankruptcy of the operating company.
The defendant in this lawsuit was both 100% shareholder and director of Holding BV. Repo Vastgoed BV in turn owned shares in three operating companies within the steel sector.
The director had a significant current account debt to Holding BV of around €1 million for four years. In 2015, the debt increased by €500,000 as the director withdrew this amount to buy high-risk securities. No agreements were made on repayment, interest or collateral. This only changed in 2015 when the tax authorities forced the director to do so.
In 2015, Holding BV also made a dividend payment of €750,000 to the director. However, in the previous years (2011-2013) Holding BV suffered losses and, although small profits were made in 2014 and 2015, there was uncertainty about continuity. This uncertainty was explicitly stated by the auditor in 2015. Eventually, ABN AMRO withdrew its credit facilities in May 2017 due to private speculation by the director with funds from the operating companies. This led to the bankruptcy of both the operating companies and Repo Vastgoed in October 2017, with Holding BV being the latest in January 2018.
Judgment of the court
The trustee held the director liable for the estate deficit and claimed the nullity of the dividend resolution. In doing so, the trustee relied, among other things, on Section 2:248(2) of the Civil Code, which states that improper management is presumed to be a major cause of the bankruptcy when the publication requirement has not been met. This was the case in 2016. The court found that Holding BV and its operating companies had not been doing well for some time before 2015 and the director had been guilty of improper management. The current account debt remained unabated despite the poor financial situation of Holding and its operating companies.
Moreover, the financing of the director's private investments had been made on imprudent terms. The payment of dividends in 2015 was also not justified given the company's financial results. ABN AMRO's confidence was undermined by these actions, which ultimately led to the Holding's bankruptcy. Indeed, without ABN AMRO's credit facilities, the companies were not viable.
Moreover, the financing of the director's private investments had been made on imprudent terms. The payment of dividends in 2015 was also not justified given the company's financial results. ABN AMRO's confidence was undermined by these actions, which ultimately led to the Holding's bankruptcy. Indeed, without ABN AMRO's credit facilities, the companies were not viable.
All this led the court to conclude that no reasonably thinking director would have acted in such a way under these circumstances, thus establishing manifestly improper management.
Nullity of dividend resolution
The court also ruled on the nullity of the dividend resolution. The Holding's articles of association stated that decision-making outside the general meeting was possible, provided all shareholders agreed in writing. However, this had not happened, resulting in a breach of the articles of association. According to Section 3:39 of the Civil Code, such a violation results in nullity, even if there is only one shareholder, to protect legal certainty and the interests of creditors. The court therefore ruled that the dividend resolution was void that the director had to repay the amount received of €750,000.
You can read the full judgment here.
Conclusion
This ruling underlines the importance of good governance within companies and the personal responsibility of directors when making financial decisions. The court makes it clear that directors must not only comply with the rules of the articles of association, but also act in the interests of the company and its creditors. Improper management, such as taking on significant debts and paying dividends in financially uncertain times, can have far-reaching consequences. Personal liability is certainly not excluded in this regard.
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