When is someone an actual policymaker?

Introduction
Bankruptcy in itself is not a pleasant scenario for a director of a private limited company (BV) or a public limited company (NV). Moreover, should the director be found to have manifestly improperly managed the company, he or she may be jointly and severally liable in private for the debts. Please note: this applies not only to the “real” director under the articles of association, but also to a so-called “actual policymaker”. Who does this actually include? You can read it here.

Directors’ liability in bankruptcy, what does it mean?
If a BV or an NV goes bankrupt, each director is jointly and severally liable vis-à-vis the estate for the debts insofar as they cannot be settled by the liquidation of the other assets (i.e.: the negative balance of the insolvent company), if the management board has manifestly performed its duties improperly and it is plausible that this is a major cause of the bankruptcy. In short: obviously, not every director is always liable in private when the company goes bankrupt, it must be a case of manifestly improper management.

Furthermore, the law indicates that the violation of the publication and accounting obligation leads to improper management. This is then presumed to be a major cause of the bankruptcy. The latter can be refuted by the director himself.

When is the actual policymaker also liable in bankruptcy?
For the application of the regulation of directors’ liability in bankruptcy, the law states that a director is equated with ‘the person who has determined or co-determined the policy of the company, as if he were a director’.

For example, consider the situation where the parents have transferred the company to son or daughter, son or daughter is a director under the articles of association, but where subsequently father or mother still interfere and make decisions about the company quite intensively.

According to the Dutch Supreme Court, when is someone an actual policymaker?
This was recently clarified by the Supreme Court. The case involved the following. Enalmei, a foundation under Dutch law, is the sole shareholder of Red Dragon BV. This BV has four directors. X is the sole director of the Foundation. In November 2014, X negotiated a construction loan with Rabobank for Red Dragon, for the refurbishment and operation of a restaurant. X sends e-mails to the bank showing that she is quite involved in the affairs of Red Dragon BV, even though she is not a director of the BV herself and there are other directors.

The bank demands that Red Dragon itself contributes around five million euros to the renovation. X then sends the bank invoices from a construction company and bank statements from the Foundation. It later turns out that those documents were forged. Then, on 24 December 2014, X becomes Red Dragon's sole director. The other directors then step down.

Red Dragon does not survive and goes bankrupt two years later. The trustee in the bankruptcy holds X liable for the negative balance of the insolvent company on the basis of manifestly improper management, as a director or an actual policymaker.

The district court and the court of appeal agree with the trustee. However, according to X, at the time of the negotiations with the bank, she was neither a formal director nor an actual policymaker at all.

The case eventually ends up before the Supreme Court, which ruled as follows:

"Whether someone has determined or co-determined the policy of a company as if he were a director, and can therefore be regarded as an actual facto policymaker within the meaning of Section 2:248(7) of the Dutch Civil Code, depends on the circumstances of the case. The phrase in the legislative history that a de facto overruling of the formal board is required for someone to qualify as a "policymaker as if he were a director" was apparently not intended to express that the actual policymaker must have managed the company instead of and to the exclusion of the formal board. This was meant to express that the actual policymaker must have appropriated at least part of the management authority, and thus determined or co-determined the policy as if he were a director. It can be inferred from the word 'co-determined' in Section 2:248(7) of the Dutch Civil Code that such determination of policy can also exist in the situation that, in addition, one or more formal directors continued to perform their duties as directors."

You can read the full judgment (in Dutch) here.

Final Remarks
Do you closely interfere in the affairs of a BV or NV, without being a formal director? And then things go badly wrong with the company? If so, you may be held liable as an actual policymaker by the trustee if you did not conduct proper management. It is therefore not necessary - according to the Supreme Court - that you, as an actual policymaker, have managed the company to the exclusion of the formal board.

Note: a claim for manifestly improper management can be filed in the three-year period preceding a bankruptcy. A previous discharge granted to the director does not protect the director from a claim by the trustee

Do you have any questions about directors’ liability? Or other questions about corporate law? We are happy to help.