Risks of 403 declaration greatly underestimated

Of the top 50 construction companies (Cobouw50 2018), 20 construction companies have assumed joint and several liability for the benefit of subsidiaries through relatively risky "403 declarations." Research based on public information from the Chamber of Commerce revealed this. The reason to dwell on this is that the risks of a 403 statement are still sometimes underestimated in practice, also by clients. In many cases, by the way, these are companies active in the infrastructure sector.

Effect of a 403 statement

The term "403 declaration" refers to Article 2:403 of the Civil Code. This allows a group company not to publish individual financial statements, but for the top holding company (sometimes a sub-holding) to consolidate the group company's data. The top holding company is then required to file a so-called 403 declaration, in which the holding company assumes joint and several liability for the debts arising from legal acts of the group company. This is also immediately the major disadvantage of a 403 statement. The motive for this is not (or should not be) the reduction of administrative burdens or cost savings, because the group company in question is still obliged to prepare financial statements in accordance with statutory regulations. The issue here is only the obligation to publish the financial statements, which must therefore be prepared. Cost savings are therefore hardly an issue, if at all.

Requirement of clients

It becomes different if the choice of the 403 declaration is the result of requirements imposed by clients, for example in the context of tenders. In my contribution in the October 1, 2015 CoBouw, I explained why not only does a 403 declaration create unnecessary risks for a construction company, but also that the principal is better off with a contractual group guarantee. The crucial difference between a group guarantee and a 403 declaration is that a group guarantee only creates rights and obligations between the contracting parties (the construction company, top holding company and the principal), whereas a 403 declaration allows, in principle, all creditors of the construction company (suppliers, financiers, other principals, et cetera) to recover from the top holding company. This is also undesirable for the principal because the top holding company thus also becomes vulnerable to recourse by other creditors. A group guarantee does not have that disadvantage. Moreover: a 403 statement can always be revoked, and sometimes with the result that the liability to the principal is terminated without the principal's consent. It is even controversial whether a principal should be actively notified about this. It is therefore difficult to understand why principals believe they have an interest in a 403 declaration rather than a group guarantee.

Research Cobouw top-50 construction companies

Whether a construction company has filed a 403 statement on behalf of a subsidiary can be found in the trade register. This public information shows that 20 of the 'Cobouw top-50' construction companies have filed a 403 statement on behalf of one or more subsidiaries. It is striking that these are mainly companies active in the infrastructure sector. The reason behind this has not been investigated, nor is it evident from the deposited statements, but it is plausible that this is the result of tender regulations used by various municipalities, provinces and central government, which regularly impose the requirement that the parent company of the construction company in question must be jointly liable for the fulfillment of the obligation of the group company tendering for the work in question in addition to the subsidiary company tendering for a tender.

Liability for old debts

Of the top-50 construction companies that file 403 statements, 17 have chosen to limit them in time. This limitation means that the construction company in question (the top holding company) only holds itself liable for debts of the subsidiary in question as of a certain date (usually the date the 403 statement was issued). This may be attractive in order to avoid old debts falling within the scope of the 403 declaration when it is filed. However, this so-called temporal limitation is not uncontroversial because the statutory scheme of Article 2:403 BW requires that the top holding company be liable for all debts. The text of the law does not allow for a temporal limitation. So the question is whether these declarations meet the requirements of the law. After all, the law prescribes that it must cover all debts, not just those from the date mentioned in the 403 statement.

The construction companies in question that opt for the aforementioned temporal limitation are therefore taking a risk in this regard. If the statement does not meet the requirements of the law, then the statement in question does not qualify as a 403 statement. If there is no 403 statement and no separate financial statements published, then the obligation to publish the separate financial statements has simply not been met and the director of the subsidiary runs the risk of personal liability in the event of bankruptcy. In short, those who think they can limit liability resulting from a 403 statement to debts incurred as of the effective date of the 403 statement are taking a risk of director liability at face value. Those who wish to avoid directors' liability can opt for the unlimited 403 statement as prescribed by law, but will then also incur liability for debts incurred before the date of the 403 statement. There are therefore disadvantages to both variants. It remains a tricky matter in this regard.

Alternatives to the 403 statement

The results of the survey reveal something else remarkable. And that is that of the 50 construction companies surveyed, 30 choose not to use a 403 statement. These are mostly the companies outside the top 10. Of these, only 1 in 4 companies has filed a 403 statement, while in the top 10 application of the 403 statement is the rule rather than the exception. Apparently, in practice, companies outside the top 10 can get by with group guarantees, or there are other reasons for staying away from a 403 statement. Although the motives behind this have not been examined, this seems to be a wise choice when weighing the advantages and disadvantages of a 403 statement against group guarantees.