Liability for faulty project records

Every legal entity is obliged to keep and maintain records. If the board fails to comply with this obligation, then (in case of bankruptcy) there is improper performance of duties and a presumption of proof comes into effect that improper performance of duties by the board is a major cause of the bankruptcy. In short, a risk of directors' liability that must be taken seriously. The same applies, incidentally, if the obligation to publish annual accounts is not complied with.

Back to keeping and maintaining records. In practice, several questions may arise about this. What exactly must records be kept? What minimum requirements must the records meet? And what about administration that is partly performed by third parties?

This contribution considers the latter question. Indeed, case law is scarce when it comes to the requirements for (project) administration. These requirements boil down to the fact that it is not only about the position with respect to debtors and creditors, but that other elements 'may' also be important. Exactly which elements are important has not yet been clarified. It is defended in literature that the nature and scope of the business activities are also important in determining which administrative documents should be present in any case. Relevant facts must be included in the records as soon as possible. It must be possible to gain insight into existing rights and obligations in a relatively simple manner. But how do you do that if the company is (partly) dependent on third parties, and they do not cooperate, for example because there are payment arrears?

Project administration not accessible

A recent ruling by the Rotterdam District Court describes a situation in which a later bankrupt installation company did not have its own project administration, because it was in the possession of a subcontractor. This subcontractor withheld the project administration due to payment arrears, with the result that when the bankruptcy of the installation company was declared, the trustee in bankruptcy did not have an easy overview of the equity position.

The trustee's claim

The trustee was of the opinion that the directors of the bankrupt installation company were therefore liable for the bankruptcy deficit. His position was that the nature of the installation work to be carried out meant that, due to the complexity of installations, additional and less work should have been taken into account, and that this was properly recorded. However, the documents needed to substantiate a claim for extra work against the client were not in the possession of the installation company but in the possession of a subcontractor. The required insight into the equity position was thus lacking. The consequence, the trustee said, was that the directors had to pay for the deficit in the bankruptcy. 

Judgment court

The court, however, did not want to get into it, stating that the installation company had balance sheets and column balances that in themselves provided a quick and detailed understanding of the company's rights and obligations. The court did agree with the trustee that in a case such as this, the project records were relevant to whether the duty to keep records had been met. However, the point is that the court held that the mere fact that the time records (the most important part of the project records) were not located with the installation company but with a subcontractor did not mean that the installation company had failed in its duty to keep records. After all, the project administration is actually there, just not (at least not fully) available to the installation company. The court explicitly weighed in that the nature of the business means that it can happen that documents important for the administration are with third parties (in this case an employment agency that was not paid). This outcome is understandable. Nevertheless, this ruling shows that the requirements that can be imposed on project administration (and this will be especially important for construction companies) are assessed on a case-by-case basis. As, for example, more and less work has a greater impact on a company's results and continuity, a director will have to take into account that the quality of the substantiation and its availability will be scrutinized more critically.