Director and accountant beware of dividend payments!

If, as a director, you pay dividends while thereby endangering the continuity of the company, you are liable as a director - if you knew or should have foreseen it - for the deficit caused by that distribution. In addition to the directors of the company, the auditor of the company may also be liable in the event of no or insufficient (intrusive) advice.

Terms and conditions of dividend payment

The conditions for a dividend distribution are set out in Article 2:216 of the Dutch Civil Code. The General Meeting of Shareholders (AGM) is authorized to pass a resolution to pay dividends if the company's equity exceeds the reserves that must be maintained by law or under the articles of association: the balance sheet test.

If the AGM has decided on a dividend distribution, the company's directors must approve it. The directors must test whether the distribution is justified and does not endanger the continuity of the company; the distribution test. The continuity of the company is at risk if the company cannot continue to pay due debts after the dividend distribution.

Accountant's standard of care

Pursuant to Article 7:401 of the Dutch Civil Code, the accountant must exercise the care that may be expected of a reasonably competent and reasonably acting professional. Violation of this standard may constitute breach of contract (a failure to fulfill his obligation) vis-à-vis his client, the company, but may under circumstances also be unlawful vis-à-vis the directors of the company.

What should be expected of an accountant?

An accountant who assists a company with a dividend decision may generally be expected to exercise the care of a reasonably competent and reasonably acting professional even towards the directors of the company. Even if the accountant was involved in the dividend decision solely in the context of preparing the annual accounts. However, that care does not go so far that the accountant can be expected to perform the distribution test himself - a condition for a dividend decision - or to make a suggestion for it. However, the accountant will have to draw the director's attention to the fact that a distribution may only be made if the distribution test is satisfied. It is also up to the accountant to warn the director of the liability risks. This warning will have to be more incisive and concrete the greater the financial problems known to the auditor. For this purpose, it is insufficient for the auditor to have the director confirm prior to the dividend distribution that the company would be able to pay its due debts after the distribution.

In practice

Proceedings conducted in the Rotterdam District Court against a director and (in indemnity) an accountant involved a situation in which the accountant knew that the company had financial problems. At the time of the distribution, the company already had payment problems, there was a liquidity shortage, and the company was suffering losses. Also, the director of the company had expressed his concerns to his accountant about a possible bankruptcy and its consequences for him personally.

Therefore, in its ruling of February 3, 2021, the Rotterdam District Court ruled that the auditor should have warned the director more intrusively about the need to perform the distribution test and should have pointed out the liability risk. Failing to do so constituted breach of contract against the company and wrongful conduct against the director. Importantly, the court also found that the accountant had much more knowledge about the requirements for dividend decisions than the director. The size of the company, the type of director and the extent to which the director relies on his accountant therefore play a role in the assessment.

When does the role of the accountant go (even) further?

The Supreme Court ruled in its July 2, 2010 ruling that if the dividend distribution not only jeopardizes the continuity of the business but also makes the distribution a major cause of the bankruptcy, a negative opinion from the auditor is required. In those exceptional cases, an (emphatic) warning is not sufficient.

If you as a director or accountant have any questions on this topic please feel free to contact me or any of the attorneys from my team.