No director liability in case of transfer of business activities (?)

Nothing is more frustrating than your invoices not being paid even though the goods or services you provided were accepted by your debtor without complaint.

If a debtor can no longer pay the invoices, the creditor may sometimes decide to write them off as irrecoverable. But do not do so too quickly, because there are opportunities to collect your receivables anyway, by using the doctrine of directors' liability. Erik Jansen explains.

The doctrine of directors' liability

In fact, the Supreme Court has developed the doctrine of directors' liability in a series of judgments. Hereby individual creditors or other injured parties can hold a director of a BV or other legal entity personally liable for the debts that this BV or other legal entity leaves unpaid. Thus, the doctrine of directors' liability is not or hardly regulated by law, but has developed mainly through case law. It is a complicated doctrine, but it is also one that offers opportunities for business owners to collect claims. Therefore, basic knowledge of it as business owner, accounts receivable manager, CFO, controller or accountant is very useful!

High threshold

The threshold of directors' liability is high. After all, entrepreneurship is about seeing opportunities and taking risks. business owners is allowed to make mistakes and entrepreneurial choices can and do go wrong. This does not always necessarily lead to directors' liability. It must always be possible to impute serious personal misconduct to the director in question in order to be able to attribute directors' liability in a court judgment.

Two main bases

Director liability has two main bases. A director can be held liable:

1. If the director knew or reasonably should have understood at the time of entering into the commitment that the company would be unable to meet its obligations and would have no recourse for the resulting loss (the Beklamel standard).
2. If the director knew or should have understood that the company's actions brought about by him would result in the company failing to fulfill its (pre-existing) obligations (frustration of recourse) (Receiver v.oelofsen).

Frustration of story

On this second basis, the Arnhem-Leeuwarden Court of Appeal rendered an interesting judgment on January 4, 2022 (source: SDU, FIP newsletter week 10). I summarize the relevant facts very briefly:

• Debtor Puur Interieur did not pay invoices from and creditor Gerridzen, but the creditor could not prove that the first basis (Beklamel) applied.
• Debtor Pure Interior itself had a large claim against another party, won the lawsuit over it, but the other party went bankrupt and no payment was made.
• Subsequently, debtor Pure Interior is dissolved by its director.
• The activities of debtor Pure Interior are subsequently continued in another company owned by the same director, Interstyle.

In particular, the last two facts mentioned are often before judges for review when it comes to directors' liability. There are invoices from a creditor and the debtor's director cannot and/or will not pay those invoices. Sometimes there is an emotion behind this from a lost court case that the debtor's director still does not agree with. But payment will have to be made - that is a matter of law. The director of the debtor really doesn't feel like doing that, and he decides to set up a new limited liability company and continue with it. And the creditor whom the director dislikes then "nicely" misses out in the old (emptied) BV.

Such a case obviously stinks, you would say as a creditor: "my means of redress are frustrated because the activities in one limited liability company (my debtor) are discontinued, while future profits are grabbed in a new, clean, limited liability company."

You often see judges go along with this and indeed rule that there is frustration of the creditor's ability to recover. So not the Arnhem-Leeuwarden Court of Appeal this time!

The Court considered:

"The Court of Appeal held that the mere fact that [the director] used his knowledge and skills to earn a living by deploying his expertise in another incorporated company is not unlawful in principle. After all, if [the director] had been employed by another company and had thus used his know-how to earn a living, this could not be held against him either. This could possibly be different if assets of Pure Interior had been transferred to that new company, such as, for example, current orders, the order book or intellectual property rights. [the director] has disputed this with reasons and Gerridzen has not sufficiently substantiated that this is the case, although certainly at this stage of the proceedings this would have been in her path."

Missing opportunity (?)

Creditor Gerridzen is missing the boat: the director of Puur Interieur is not held privately liable, even though he "let one BV fold" and went back to making a profit in the other BV.

Apparently, Gerridzen was unable to convince the court that profit capacity had been withdrawn from the company: the court lists some assets that were apparently debated, which were not shown in court to have been present in the old Puur Interieur BV.

But taken more broadly, one could argue that the goodwill, name recognition, website, telephone number, network and "corporate opportunities" (perhaps no current orders or order portfolio, but perhaps requests for quotations) also represented a value and that the new Interstyle BV should have settled that with Pure Interiors. And then Gerridzen could have recovered on that purchase price.

But that is not easy: Gerridzen would then also have had to argue - and, if contested, prove - that this purchase price should have been there and how high it should then be. After all, it is up to the creditor to state and prove the extent of her damages.

Conclusion: seeing opportunities and seizing opportunities

I would actually consider cassation in this case. I explain that in more detail below. Unfortunately, the pecuniary interest is only limited, so I would also understand if that were to be waived. But the comparison the Court of Appeal makes about bringing in knowledge and skills in paid employment is not correct in my opinion. The choice is not for salaried employment, but for entrepreneurship.

More importantly, the preliminary question is, whether that knowledge and skill belongs to the DGA, or to the company in question. After all, perhaps the knowledge and skills were acquired through training and courses paid for by the company. So whose knowledge and skills belong to the DGA or to the company?

Moreover - as I said - it is more than knowledge and expertise, it is also about brand awareness and other value components I mentioned. And - especially in creative professions and in services - there is often the discussion: is the name recognition of the DGA-business owner, of the architect, of the lawyer, of the tax expert, of the consultant, of the website designer, an asset (goodwill) of the BV, or of the DGA himself? And perhaps the DGA's name recognition and network came about and grew because the company jarenlang paid for his membership in the local golf club and business clubs and advertised the DGA's portrait for years.

Just goes to show: directors' liability is an unruly doctrine. The case discussed "stinks," yet the creditor still misses out.

In an earlier blog, I concluded that litigating on directors' liability grounds is actually like doing business: it is seeing opportunities and taking risks. See this blog about that.

A good quick scan of your case - held against the case law as it has developed in this regard - and then further analysis of your evidentiary position, may lead to the conclusion that the likelihood of directors' liability is high and that the risk of dismissal of the claim by the court may be small.

Do you take that chance, or book your claim?