Payments in times of (corona) crisis

That the corona crisis does lead to job losses and a (sharp) increase in bankruptcies has now become painfully clear. For some companies, the package of support measures and useful tips (see, for example, this blog ) are simply insufficient to keep their heads above water. The decision to file for bankruptcy is a tough one and is also often accompanied by a period of uncertainty about what you, as a director, are still allowed to do and what is certainly no longer allowed.

Irregularities in sight of bankruptcy

There is often much discussion between the trustee in bankruptcy and the director of the bankrupt company about legal acts performed within sight of the bankruptcy. For example, the trustee can annul legal acts by invoking the bankruptcy pauliana and can, under circumstances, sue directors privately on the grounds of tort (directors' liability).

Unlawful selective payment

One form of director liability is the so-called wrongful selective payment. The trustee in bankruptcy then accuses the director of the bankrupt company - in private - of putting creditors ahead of other creditors because selective payment can be a form of unwillingness to pay. In particular, the period around, but especially after the bankruptcy declaration has been made, is under a magnifying glass.

If a selective payment is unlawful, the trustee can claim payment of the amount paid from the director of the bankrupt company, i.e. you. Note that you will then have to compensate the damages of the other creditors, even though you were not the recipient of that money. After all, you did not pay yourself, but a creditor of the company! If the trustee makes that accusation, the trustee must show and prove that the payment constitutes a wrongful act. The trustee must also prove that the director is personally at fault with regard to those payments.

It is often argued in the literature that it should be up to the director to argue that a selective payment is not unlawful by applying the reversal rule. The Supreme Court recently r uled on this and does not want to go there: the starting point is that selective payments are allowed in principle and that it is up to the trustee to argue and prove that specific payments are nonetheless unlawful.

All payments?

Does this now mean that in the face of bankruptcy all payments may simply be made? No, the starting point is that payments are allowed, but the freedom becomes more limited if it has been decided to terminate the company and the director knows or should understand that not all debts can be paid. Thus, a selective payment may constitute a wrongful act on the part of the director if the director can also be personally blamed for that payment.

Payments to group companies

We know that selective payments to group companies (i.e., within the group) in the face of bankruptcy qualify as unlawful (HR ECLI:NL:HR:1998:ZC2669 (Coral/Stalt)). For other payments, the board is allowed to weigh up whether to make them. Compulsory creditors and necessary costs for the preservation of the company ("estate recovery") seem to be "just" allowed to be paid.

Personal interest

Payments to non-group companies may also be unlawful if the director has a personal interest in making a payment to that particular creditor. For example, for future collaborations, or when the director is a private guarantor for a debt of the bankrupt company. The Supreme Court previously determined this in its X v. Secretary of State of Finance ruling.

Advice for directors

So it is not black and white and that is unsatisfactory. Which payments qualify as unlawful will therefore remain a subject of debate for some time to come.

As a director, you are well advised to make no payments from the moment you have filed for bankruptcy or know that bankruptcy is inevitable. Better safe than sorry. Should you nevertheless be confronted with forced creditors, consider whether a payment really cannot wait. In any case, the trustee will demand an explanation as to why a payment was still made.

Should your company also find itself - whether because of the corona crisis or not - in financial difficulties, be well informed about your position as director by a lawyer: a quick-scan directors' liability and group liability can prevent a lot of (extra) pain. See, for example, this blog by my colleague Laurens Sjoerts on directors' liability.

By the way, bankruptcy is not the only option. Have you ever thought about restructuring the company's debts through a composition agreement? About that, see this blog by my colleague Erik Jansen.