Black work and loyalty for the construction company

A director of a construction company (B.V.) must ensure that construction projects are carried out within the construction company and not outside it. This is his duty to the construction company, employees, shareholders and financiers. There can be (substantial) risks if this is lost sight of. This is not just about undeclared work, but also the principle that a director is obliged to take advantage of opportunities in the market for the company and not for his own interests.

How black work can go wrong

The risks of working black can be far-reaching, according to a recent ruling by the District Court of The Hague. This shows that it is about more than fiscal risks being run. What was going on? Two brothers (X and Y) jointly ran a construction and demolition company in the form of a B.V. of which they were both sole and independently authorized directors. Both construction and demolition activities were operated from this company. X was responsible for the demolition branch and Y for the construction branch. It is established that Y had taken on some jobs in the black. The construction company subsequently went bankrupt. The receiver settles the case with Y and starts proceedings against X, who claims that he is not to blame because he was not the one who was working undeclared. However, the court rejected this defense and ruled that the board of a company is collectively (i.e., X and Y together) responsible for its policy. The court orders X (the director who was precisely not responsible for the branch in which the black work took place) to pay the entire bankruptcy deficit to the trustee. He presumably did not see that coming.

Distracting implications

Although X complied nicely, he is personally liable for the entire deficit in the bankruptcy because his brother worked black. This may look unfair to the reader. Still, the court's ruling is not surprising. After all, a director must serve the interest of the construction company (the B.V.). This includes a critical attitude of one director towards another, an active role to discover abuses in the company and taking measures to prevent them. And undeclared work in this case boils down to one director (Y) himself earning from work that should actually have been awarded to the construction company. The other director (X) should not allow that to happen.

Corporate opportunity

In practice, it is often forgotten that the basic principle - that a director has to serve the interests of the company - also applies outside bankruptcy. Apart from the question of undeclared work, it is therefore not automatically permissible for a director to pass on commercial opportunities (in jargon: 'corporate opportunities') to parties related to him, for example because he is involved as a shareholder. If the director in question is also the sole shareholder of the construction company, the soup will normally not be eaten so hot. But if other shareholders are involved, it is not difficult to imagine that they will object to the fact that the director is passing on opportunities to other affiliated parties when he should be serving the interests of the company. It is sometimes forgotten that a director, even if he does not have a non-compete clause in his employment or management contract, may not simply compete with the company. If you, as a shareholder, are involved in a company in which this is the case, there are possibilities to take action against this.

Mismanagement

In the event that there is reason to doubt whether a director has not violated the principle that he must put the interests of the company (the construction company) first, then you can file an objection with the Enterprise Chamber of the Amsterdam Court of Appeal, a specialized body that deals primarily with this type of case. If it turns out that the director is guilty of mismanagement, the consequences for the director can be far-reaching. For example, the Enterprise Chamber can suspend or dismiss this director, 'freeze' shares or annul decisions. In practice, the Enterprise Chamber has a reputation for being very critical of directors who do not take the best interests of the company too seriously.

In short, if you are a director of a construction company, keep in mind that you are expected to act against cases in which projects are passed on to parties other than the construction company. For example, if you are involved as a shareholder in a company in which you notice that the board is not following this principle very closely, remember that there are ways to stand up for your interests.