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Bill relating to Directors Disqualification sent to Parliament in the Netherlands

Bill relating to Directors Disqualification sent to Parliament in the Netherlands

11.09.2014 NL law

On 1 September last the Dutch Minister of Justice submitted a bill relating to Directors Disqualification (the "Bill") to the Dutch Parliament. The most important elements of the Bill are the following:

  • The Bill when enacted introduces directors disqualification rules under corporate law.
  • A director's disqualification is meant to become effective only as "an exceptional sanction in exceptional circumstances".
  • Directors of all types of legal entities that are governed by Dutch law may be disqualified.
  • The disqualification can only apply in the event of insolvency.
  • Only the bankruptcy trustee end the public prosecutor may initiate a claim for a director to be disqualified.
  • Only (former) managing directors of a bankrupt legal entity and persons who have (although not being a managing director)  actually managed the legal entity as if they were an managing director may be disqualified. Supervisory directors cannot be disqualified under the Bill.
  • If a legal entity has a one tier board only the executive members of the board may be disqualified.
  • Directors may only be disqualified in the specific cases set out in the Bill.
  • In those cases the Court may disqualify a director but is not required to do so. The court may also limit the scope and duration of a disqualification and such disqualification may not be imposed for a period in excess of 5 years.
  • If a director is disqualified he cannot during the period of his disqualification serve as an managing or supervisory director of a Dutch legal entity nor is he allowed (even when not being formally a managing director)  to effectively manage Dutch legal entities as if he was a managing director of such entity.
  • A disqualification only becomes effective upon the right to appeal the decision either to the Court of Appeal or the Dutch Supreme Court having expired and the judgment imposing the disqualification having become irrevocable.
  • Before a disqualification is ordered or before such order becomes effective, the Court may suspend a (former) managing director as managing or supervisory director of other Dutch legal entities on which board he serves.

Background and objective of the Bill

The Bill forms part of a broader legislative program updating Dutch bankruptcy law. Apart from the introduction of the possibility to disqualify directors, the program includes a proposal to enhance the continuity of businesses in distress (reorganization and pre-pack), to amend the rules on fraudulent action in the case of a bankruptcy under Dutch criminal law, to increase the powers of a bankruptcy trustee and generally to modernize bankruptcy proceedings. Certain rules that currently only apply in bankruptcies of  specific types of legal entities will be extended to apply to all legal entities. All of these programs are projects of the Dutch legislator. Apart from these developments, negotiations are pending in the EU on revising the Insolvency Regulation.

The objective of the bill is fighting fraud in bankruptcy. In order for a managing director to be disqualified it is not necessary that criminal charges are brought. A managing director may be disqualified if he has manifestly not fulfilled his duties in a proper manner. According to the explanatory notes to the Bill a director’s disqualification should only be "an exceptional sanction in exceptional circumstances".

Scope of the Bill

The director’s disqualification may only be asked to be imposed upon managing directors of legal entities that are governed by Dutch law and upon persons who have (although not formally being a managing director)  effectively managed the legal entity as if they were an managing director.[1] Supervisory directors of a bankrupt company cannot be disqualified. However, one should be aware that if a managing director (or a person who has effectively managed the legal entity as if he was a managing director although not formally being a managing director ) is disqualified, he also cannot act as supervisory director.

If a Dutch company is as such a managing director of a Dutch legal entity, its direct or indirect managing directors (or persons who have effectively managed the legal entity as if they were an managing director) may be disqualified. 

If a managing director (or a person who has (although not formally being a managing director)  effectively managed the legal entity as if he was a managing director) is disqualified,  he cannot be a managing director or a supervisory director of other Dutch legal entities for a period equal to the period that he is disqualified. However, the Court may allow him to serve as a managing director or supervisory director of specific companies.

Start and duration a the disqualification

The bankruptcy trustee or the public prosecutor may ask the court for a disqualification. The explanatory notes to the Bill emphasize that it should rather be the bankruptcy trustee than the public prosecutor who should ask for the disqualification even if this would involve additional costs for the bankrupt estate.

A disqualification may be ordered for a period of up to five years and starts once the court decision imposing the disqualification is no longer subject to appeal. Because a decision may be appealed to the court of Appeal and subsequently to the Dutch Supreme Court, the disqualification may only take effect a long time after the opening of the bankruptcy. In view thereof the Bill opens the possibility for the Court to also suspend a managing director who serves as a managing director or as a supervisory director of other legal entities.  The period for which someone is suspended is not automatically deducted from the maximum period of five years of the disqualification. However, the Court may take the period that someone was already suspended into account when determining the time of the disqualification.

The situations in which a disqualification may be ordered

A director’s disqualification may only be ordered if specifically listed facts have occurred during the bankruptcy or during a period of three years before the bankruptcy was opened:

  • the managing director has been held liable on the basis of Article 2:138 or 248 of the Dutch Civil Code by a Court decision that is no longer subject to appeal;
  • the managing director has consciously and purposely been involved on behalf of the legal entity in actions of fraudulent conveyance (Articles 42 or 47 of the Dutch Bankruptcy Act) as a result of which creditors have suffered considerable damages and those acts have been nullified by a Court decision that is no longer subject to appeal;
  • notwithstanding a request of the bankruptcy trustee, the managing director to a serious degree fails to fulfill his obligations towards the bankruptcy trustee to provide information and to cooperate with him;
  • the managing director was either as a managing director or as a natural person operating a business in his own name at least on two occasions earlier involved in the bankruptcy of a legal entity and he can be found culpable personally for such involvement; or
  • a tax penalty based upon Articles 67d, 67e or 67f of the Algemene wet inzake rijksbelastingen (the General Act on national taxes) has been imposed on the legal entity or the managing director in that capacity and such penalty is no longer subject to appeal

In all instances, the managing director must have been found culpable personally before he may be disqualified.

The bankruptcy trustee needs the approval of the Supervising Judge in the bankruptcy before he may pursue the disqualification of a managing director in Court. Creditors do not have the right to apply for disqualification, but they may ask the Supervisory Judge to instruct the bankruptcy trustee to apply for disqualification.

The Court has discretionary powers

If the requirements for the court to be able to order the disqualification are satisfied, the court may, but does not have to, order the disqualification. The Court may order a shorter disqualification than five years and may also exclude certain legal entities form the disqualification. The explanatory notes provide amongst others for the possibility that a managing director has been appointed by the Enterprise Chamber during inquiry proceedings while the company already has serious financial problems, that the suspension of the managing director was ordered by the court pending the proceedings and the possibility that the involvement in two or more other bankruptcies during the period of three years prior to the bankruptcy which gives rise to the application for disqualification, was due to the fact that those companies were part of the same group of companies with financial difficulties.

Consequences of a disqualification

The immediate consequence of a disqualification is that the person involved cannot longer serve during the period of his disqualification, as a managing director or as a supervisory director of a Dutch legal entity and that he is not permitted (although not formally being a managing director)  to effectively manage Dutch legal entities as if he was a managing director of such entity and cannot be appointed in such capacity. The fact that a managing director or a supervisory director is removed is registered with the Trade Register. The registration is automatically removed at the end of the disqualification. The information on a disqualification will probably not be accessible for the general public.

If a managing director or a supervisory director is suspended this will also be registered with the Trade Register. The fact that this is caused by a disqualification will probably not be registered.  

If the Court disqualifies or suspends a managing director or a supervisory director and the legal entity would as the result thereof no longer have any managing directors or supervisory directors, as the case may be, the Court may temporarily appoint a managing director or a supervisory director.  The competent corporate bodies of the legal entity may subsequently replace a person who has been so temporarily appointed

Transitory provisions

The Bill when enacted will generally have no retroactive effect.

 


 

[1] This includes legal entities incorporated pursuant to EU regulation that have their corporate seat in the Netherlands. It may also be imposed upon natural persons that operate a business under their own name.

 

Team

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