Painful misunderstandings in construction about BV i.o.

A limited liability company (BV i.o.) is best avoided. Yet it is precisely in construction practice that we often see it go wrong. What is the problem?

In the case of building consortia or cooperation in the context of project development, it is sometimes desirable to start working with a provisional form of cooperation such as the BV i.o. (the "i.o." stands for "in formation"). This is the subject of this contribution.

Arranging relationships within BV

It regularly happens that it is not clear in advance exactly how a particular collaboration (construction consortium) should take shape. If a BV is chosen, it is not always immediately clear how the relationships within the BV will be arranged. In order not to lose any time, it is sometimes chosen to register a BV i.o. in the trade register, and later, at a time when it is clear how shares will be distributed and how the board will be set up, to incorporate the BV. In the meantime, the BV i.o. can already appear to the outside world. Problems arise if commitments are made on behalf of the BV i.o. which later turn out not to be feasible. For example, because financiers drop out or because a contract is ultimately not awarded.

Risks underestimated

In my experience, the risks of a BV i.o. are grossly underestimated in construction practice. The risk of working with a BV i.o. can be illustrated by a recent decision of the Arnhem-Leeuwarden Court of Appeal about a BV that operated a company in the field of infrastructure technology. What was the case? The infra company had been founded with a view to infra activities for telecom companies. What went wrong was that the company existed (too) long in the form of a BV i.o.. Only when the company no longer had any prospect of getting back on its feet, the staff remained unpaid, and several potential financiers had dropped out, was the BV incorporated and subsequently dissolved. The court of appeals ultimately ruled that the director who ultimately founded the BV and, within that framework, ratified all legal acts, was personally liable for the entire deficit in the bankruptcy.

Founder liable

This outcome is not surprising. At the moment a BV i.o. is still incorporated and thus becomes a "real" BV, the BV may indeed take over the rights and obligations of the BV i.o., but the founder remains liable if he knew or could reasonably have known that the BV would not fulfill its obligations. If it goes bankrupt within a year, then things get a degree worse, because the law then assumes that the founder knew of the risk that the BV ultimately created would not be able to fulfill its obligations.

Distracting implications

This ruling has very far-reaching consequences for the founder of the infrastructure company. After all, he is (personally) liable for all debts of the bankrupt BV. The wry thing is that this risk could probably have been easily avoided by incorporating the BV right at the start of its activities. After all, it is not necessary to wait with incorporation until it is exactly clear who the shareholders and directors will be. This can also be changed after incorporation.

Existing BV

Another possibility is that an existing limited liability company had entered into the contract subject to the right to transfer the contract to another company. This can also be done by including that the contracting party acts for a "master to be named. This legal possibility gives considerable freedom to transfer a contract to another (legal) person, with or without a 'special purpose vehicle'. The principal, in turn, will presumably prefer to see a limited liability company (BV i.o.), so that it will be in a better position to recover from the founder, should it all go wrong.

However, for the contractor and project developer, never deal with a limited liability company (BV i.o.). Establish the limited liability company before it makes commitments or contract with the caveat that the contract can be transferred to a yet to be established limited liability company.