Liability Risk for Directors in the Event of Interim Distributions to Shareholders
Court of Amsterdam 21 April 2010 (Kemp in his capacity as
such/Idee et al.)
Distributions of Profits
Dutch companies, private limited companies (B.V.s) and
public limited companies (N.V.s) may make distributions of
profits to their shareholders as long as the statutory requirements
are met. A distribution of profit requires first of all a
resolution to that effect, passed by the body authorized thereto
pursuant to the articles of association. In addition, distributions
of profits are only permitted up to the amount of the freely
distributable reserves (N.V.: Section 2:105 (2) of the
Dutch Civil Code ("DCC"); B.V.: Section 2:216
(2) of the DCC. The reference date to establish whether this
condition has been met is the day on which the distribution takes
place. If this requirement has not been met, the resolution to
distribute will be void and the shareholder must repay the amount
to the company as unduly paid.
With regard to the N.V., the board of directors is
obliged to draft an interim statement of assets and liabilities,
from which it appears that the freely distributable reserves permit
the proposed distribution (Section 2:105 (4) of the DCC. The
interim statement of assets and liabilities must formally relate to
figures on a date not earlier than the first day of the third month
preceding the month in which the resolution to distribute is
published. With regard to the B.V., such a balance sheet
test is not prescribed, but it is recommended. In addition, the
board of directors has to verify whether the freely distributable
reserves available on the date of distribution allow for the
distribution. If the general meeting was aware or should have been
aware that losses suffered after the balance sheet date have
reduced the reserves that were available at the time, this balance
sheet may not be taken as a starting point.
In the proposal to distribute profits, the board of directors
must also take the interests of the creditors of the company into
account. In 1991 the Dutch Supreme Court already ruled in the
Nimox judgment that if the sole shareholder of a company
that was declared bankrupt afterwards passes a resolution to
distribute all freely distributable reserves available, this may be
unlawful towards the creditors.
Distributions of profits are made on the basis of the adopted
annual accounts from which it appears that the company has reserves
that are eligible for distribution. Besides, distributions to
shareholders may take place chargeable to a reserve prescribed by
the articles of association, and interim distributions may be made.
Interim distributions of profits - during a current financial year
with regard to annual accounts not yet adopted - may take place if
permitted by the articles of association, and up to the amount of
the freely distributable reserves. Interim distributions are
regarded as an advance to the profit available after the adoption
of the annual accounts, as a result of which, before the annual
accounts over that financial year are established, a shareholder
takes the risk that the amount that has been paid in excess must be
repaid to the company.
Court of Amsterdam 21 April 2010 (Kemp in his capacity
as such/Idee et al.)
On 21 April 2010 the Court of Amsterdam rendered an interlocutory
judgment, which dealt with the risks for liability of a sole
shareholder and director for losses of creditors because of
authorized distributions of profit and of reserves.
In this case the following occurred. Idee, of which company Stoop
was sole shareholder and sole director, was sole shareholder of
Vezass Holding B.V. (Holding), which company holds shares in,
inter alia, De Financiële Kamer B.V. (DFK), a company
engaging in insurance brokerage activities. In its business
management, businesses such as DFK must take into account a
substantial reversed booking, with an annually varying amount, of
commissions received in excess from insurance companies for
brokered life insurances. Since the annual accounts over the
financial year 2004 had not been adopted yet, on 30 June 2005 the
sole shareholder of Holding resolved to make interim distributions
of profits and a distribution of an amount chargeable to the share
premium reserve to itself. On 5 September 2005 a resolution was
passed to make another interim distribution of profits on the basis
of an interim statement of assets and liabilities as per 30 June
2005, from which it appeared that there were sufficient freely
distributable reserves. Next, since the annual accounts over the
financial year 2005 had not been adopted yet, on 1 March 2006
Holding, as sole shareholder of DFK, resolved to make an interim
distribution of profits. There was no interim statement of assets
and liabilities as per 1 March 2006. As of September 2005 the
results of the group as a whole declined, but DFK did not suffer a
loss until September 2006. In August 2006 the bank provided a
temporary extension of the credit facility until February 2007. In
February 2007 the credit was terminated and next a petition for the
bankruptcy of, inter alia, Holding and DFK was filed.
On the demand of the receiver, the Court ruled, inter
alia, as follows:
- It appears from the annual accounts over the financial year
2004, presented after the resolution to distribute and adopted
on 30 June 2005, that there were sufficient freely
distributable reserves and that the resolution was therefore
validly passed. When determining whether Holding had sufficient
freely distributable reserves, the results of Holding's
participations do not have to be eliminated.
- The resolution to distribute that was taken on 5 September
2005 was invalid, due to insufficient freely distributable
reserves. The statement of assets and liabilities of 30 June
2005 that was attached as an annex to the resolution contained
provisional figures that appeared to have been calculated too
optimistically. However, the parties could agree to convert the
invalid resolution into a valid resolution to distribute the
amount that was permitted at the time.
- Stoop and Idee may be liable as directors towards creditors
for the preparation and execution of the unpermitted
distributions, if they knew or should have known that this
distribution of dividend would seriously jeopardize the
continuity of the company. In that case the management may also
manifestly have performed its duties improperly as meant in
Section 2:248 of the DCC, on the basis of which the directors
would be jointly and severally liable towards the estate for
the amount of the debts. Whether the Court would rule
accordingly depends on the analysis by an expert of the extent
of the reversed booking for which a provision should have been
included in the balance sheet: “[..] whether at the time
when the three disputed dividend resolutions were adopted and
executed the reversed booking was so big that Stoop and Idee
seriously had to take into account that after the distributions
would have been made the companies they managed would not have
been able to meet their obligations anymore and subsequently
would not offer any recourse for the loss that the creditors
would suffer as a result thereof.”
Conclusions
Interim distributions of profits may appear to be invalid when the
annual accounts over the financial year are adopted in which or
with regard to which these distributions have been made. In that
case, the shareholders must repay the unduly paid amounts.
Although a resolution to distribute may have been passed validly in
itself, in the event of a bankruptcy directors run the risk of
joint and several liability if it is ruled in a legal action that
they have cooperated in the realization and execution of
resolutions to distribute that may seriously damage the interests
of creditors and may jeopardize the continuity of the company.
Therefore, for each resolution to make a distribution to
shareholders, boards would do well to draft a well-substantiated
interim statement of assets and liabilities as per the distribution
date, to include a provision for any substantial business risk and
to explain the calculation of such provision in a written board
resolution. Directors being requested by the company’s shareholders
to cooperate with an interim distribution of profits may consider
the following alternative. The company could provide its
shareholders with an advance on the profits which it eventually
will appear to realise, by means of a loan in stead of an interim
dividend, part of which loan amount, which should exceed the
realised profit amount appearing from the annual accounts with
auditor’s statement, should be repaid once the annual accounts are
adopted.