The Amsterdam Court of Appeal recently ruled in a case that raised the question of whether a personal guarantee provided by the director of a BV for a loan granted to the BV was legally valid. Because the BV did not comply with the loan agreement, the lender wanted the loan to be repaid with interest by the director. The spouse of the director appealed for annulment because she had not given her consent for the guarantee. Was this successful?

The case

X is stakeholder and director of Y B.V. Y is a financial holding company. Article 2 of its articles of association states that, in addition to other activities, the company's object is: "the lending, borrowing and collection of monies including, (...) as well as entering into related agreements". X is married to A.

On 13 February 2014, a money loan agreement was concluded between Y and D, pursuant to which D lent an amount of €750,000 to Y. X signed the agreement acting on his own behalf as well as in his capacity as managing director of Y.

Article 4 of the loan agreement states: "X guarantees the proper fulfilment of the payment of interest and redemption by the Borrower (Y) to D during the entire term of this Loan: (...)"

The amount of €750,000 mentioned in the money loan agreement was credited to X Beheer B.V.'s bank account.

Subsequently, a settlement agreement was concluded to which D, Y and X were parties, which included that D agreed that the loan would be settled by dividend payments from E.

In a letter dated 2 August 2018, D's lawyer summoned Y to make (repayment) of the loan and the overdue interest. He also announced that if payment was not forthcoming, the security provided would be enforced. Y did not comply with the summons.

In a letter dated 31 October 2018, A, relying on Section 1:89 of the Dutch Civil Code, stated that she would nullify the loan agreement insofar as it contained a guarantee by X for Y's debts.

D then levied a conservatory attachment on, among other things, some immovable property owned by X and commenced proceedings.

D based its claim on the fact that the loan granted to Y and the interest owed on it were due and payable. Because Y remained in default of repayment of the loan and the interest was not paid (in full), X was obliged, according to D, to pay these amounts to D on the basis of the guarantee it had provided.

X took the position that he owed nothing to D, because the guarantee had been annulled by his spouse on good grounds. In addition, he argued that Y had never received the loan as the payment had been made directly to X Beheer B.V. and that, furthermore, X could not be held liable in person because the loan was not payable, as it had to be paid out of E's dividend pursuant to the settlement agreement.

According to the court, A's declaration of annulment had had no effect and D could claim the outstanding amounts. However, the Court of Appeal reached a different opinion.

Judgment of the Court of Appeal

The Court of Appeal ruled as follows:

"For legal acts whereby a spouse guarantees the debt of another, the consent of the other (not acting) spouse is required, pursuant to Article 1:88 paragraph 1 sub c of the Civil Code. If a guarantee has been issued without the required consent, it can be annulled by the non-acting spouse pursuant to article 1:89 paragraph 1 of the Civil Code. This regulation aims to protect the spouses, in the interest of the family, from the great financial risks that a guarantee may entail.

Pursuant to Article 1:88(5) of the Dutch Civil Code, the consent of the non-interacting spouse is not required if (1) the acting spouse is the director of a private limited liability company and holds the majority of the shares, and provided that (2) the juridical act is performed for the benefit of the normal operation of the company's business. The legal act' refers to the legal act for which the security is provided, in this case the money loan agreement entered into with Y.

It is not disputed between the parties that X was a director of Y and that he held all the shares in this company when he issued the guarantee. The parties' debate focuses on whether the money loan agreement was entered into for the purpose of the normal conduct of Y's business. D states that this was the case, X disputes this.

With the words "provided it takes place for the normal operation of that company's business" in Article 1:88 paragraph 5 of the DCC, the legislator intended to impose an essential restriction. It should therefore not be assumed too quickly that this strict standard has been met. The consent of the non-trading spouse is only not required if the legal act for which the security is provided is itself one of the legal acts that normally occur in the normal course of business of that company (cf. HR 20 March 2020, ECLI:NL:HR:2020:483, under 3.2).

Contrary to D's assumption, it is insufficient for fulfilment of this requirement that it follows from Y's statement of objectives in the articles of association that its object is (inter alia) the borrowing, lending and collection of funds as well as entering into related agreements, that the loan was actually entered into in order to subsequently lend it to X Beheer B.V., and that X would not have disputed D's assertion that Y has no other activities than the borrowing and lending of money. In fact, the following facts and circumstances characterise this case.

The money lent by D was immediately on-lent to X Beheer B.V. It follows from the hearing on appeal that the parties agree that D intended to strengthen X Beheer B.V.'s financial position with the loans to Y. The amounts lent were therefore used to finance X Beheer B.V.'s activities. The amounts lent were thus (actually) raised for the benefit of X Beheer B.V.'s business.

It is not (or no longer) disputed between the parties that the loan agreement was concluded with Y for the sole reason that Y had to act as an intermediary. In this connection, the following was stated on behalf of D at the hearing in the first instance: "It is true that Y acted as borrower so that X could act as guarantor, but that was one of the reasons. At the appeal hearing it was stated on behalf of D, with regard to the other reasons, that it was not possible to contract directly with X Beheer B.V. because it was under special administration by Rabobank. X therefore called the chosen financing construction a "sham construction" in the court documents.

It is also important that X Beheer B.V. was undisputedly in (serious) financial difficulties when the loan agreement was concluded. In this connection X has insufficiently substantiated the contention that X Beheer B.V. found itself in an acute financial emergency situation, that there was no concrete prospect of repayment of X Beheer B.V.'s (substantial) debt and that, moreover, no bank was willing to finance X Beheer B.V. any longer. These assertions are supported by the recitals of the loan agreement, which state that X Beheer B.V. "urgently needs additional financing that cannot be obtained from a bank". The chosen financing construction therefore involved a special (and large) risk.

Even if D's (disputed) assertion were correct that Y has no other activities than lending and on-lending money, in view of all the above the strict standard of Section 1:88 (5) of the DCC has not been met. The money loan agreement for which the guarantee was issued has insufficient relation to the normal conduct of Y's business. The parties have therefore wrongly ignored the requirement of permission.

Conclusion

The above means that the wife had successfully appealed for annulment.

The court of appeal also noted that the fact that the person who had acted as notary and advisor for X for many years and who was employed by the legal consultancy firm that had drawn up the money loan agreement, had stated by telephone to D that no consent was required, nor that another notary had made a similar (incorrect) statement, did not affect the fact that A (the wife) was entitled to the mandatory protection of Article 1:88 of the DCC and that X could rely on this.

Because annulment has retroactive effect, the guarantee was deemed never to have existed due to A's annulment. D's claims were therefore rejected.

Do you have any questions or need advice regarding the drawing up or performance of a money loan agreement? Please contact one of our lawyers. We will be happy to assist you!