Short Reads

Supreme Court: No conflict of interests in a group financing

Supreme Court: No conflict of interests in a group financing

Supreme Court: No conflict of interests in a group financing

02.08.2017 NL law

In a recent judgment, the Supreme Court ruled, based on an application of the so-called Bruil-criterion, that there was no conflict of interests in the relationship between a holding company and its direct and indirect subsidiaries based on the purpose, background and structure of their group financing relationship.

Supreme Court, 3 March 2017, (ECLI:NL:HR:2017:363 and ECLI:NL:PHR:2016:1319).

Under the laws of the Netherlands, a director of a private company with limited liability (besloten vennootschap met beperkte aansprakelijkheid) must not participate in the deliberation and adoption of resolutions if he has a direct or indirect personal interest which conflicts with the interests of the company and the undertaking connected with it (Section 2:239 paragraph 6 of the Dutch Civil Code (Nederlands Burgerlijk Wetboek, the "DCC")). Prior to 1 January 2013 the laws of the Netherlands (under the old Section 2:256 of the DCC) provided that unless the articles of association provided otherwise, the company was represented by a supervisory board member in all cases where it had a conflict of interests with one or more of its directors. Also, the general meeting was at all times authorized to appoint one or more other persons to represent the company.  

The judgment is based on the scope of Section 2:256 of the DCC before it was abolished. In order to determine whether a conflict of interests existed, the Supreme Court applied the leading Bruil-criterion (Bruil/Kombex, Supreme Court, 29 June 2007, ECLI:NL:PHR:2007:BA0033), which states that all relevant circumstances of the matter at hand should be taken into consideration. The party invoking the conflict of interests needs to put forward circumstances that could have influenced the decision of the relevant director in such a way that he should have considered himself not being able to act in the interests of the company with the required integrity and objectivity. It should be noted that not every personal interest of a director conflicts with the interest of the company.

In short, the background of the case was as follows: A holding company entered into a loan agreement with a private lender (the "First Agreement") because the group it headed was in urgent need of funding. Five days later, X - which was not a subsidiary of the holding company - agreed to become jointly and severally liable for the repayment obligations of the holding company under the First Agreement and in order to safeguard its own claims against the holding company (the "Second Agreement"). Further, X obtained a right of recourse against the holding company and the direct and indirect subsidiaries of the holding company (the "Subsidiaries") in case it would pay off the debt under the Second Agreement. While signing the Second Agreement the Subsidiaries were represented by the holding company as their (indirect) managing director. In turn, the holding company was (indirectly) represented by Mr O, who was also a(n) (indirect) shareholder of X.

A few months later, the holding company and the Subsidiaries were declared bankrupt and X submitted claims of around EUR 2.5 million in the bankruptcies of the holding company and the Subsidiaries. Only the claim in the bankruptcy of the holding company was recognized. X started legal proceedings arguing, among other things, that because of its contractual right of recourse it should also be admitted as a creditor in the bankruptcies of the Subsidiaries. The bankruptcy trustee (curator) opposed this and argued that there was a conflict of interests since the entering into of the Second Agreement was in the interest of the holding company and Mr O but not in the interest of the Subsidiaries, and that therefore the Subsidiaries had not been duly represented while entering into the Second Agreement.

The Arnhem-Leeuwarden Court of Appeal ruled that no joint and several liability of the Subsidiaries had been agreed in the First Agreement, but that this had been an omission which was subsequently redressed by agreeing the right of recourse against the Subsidiaries in the Second Agreement, and that therefore both agreements should be treated as one legal act in determining whether a conflict of interests existed. The Court of Appeal argued that it is common practice in financing arrangements that subsidiaries that benefit from a loan undertake to join the parent company as a co-debtor. The Court of Appeal ruled that the right of recourse by X against the holding company and the Subsidiaries in the event that X paid off the debt was meant to place X in the same position as the lender had the Subsidiaries been jointly and severally liable under the First Agreement. Further, the Court of Appeal ruled that entering into this "emergency loan" agreement was in the interests of both the holding company and the Subsidiaries.

The Supreme Court followed the Court of Appeal and concluded that based on the purpose, background and structure of the group financing relationship there was no conflict of interests. The bankruptcy trustee did not provide sufficient facts and concrete circumstances - as the Bruil-criterion requires - that could have influenced the decision of the relevant director in such a way that he should not have considered himself able to represent the interests of the company and the related business with the required integrity and objectivity and should have abstained from the relevant legal act. Finally, the Supreme Court considered the fact that the joint and several liability of the Subsidiaries was created only as a consequence of X entering into the Second Agreement and obtaining a right of recourse against the Subsidiaries as unimportant. The result is the same as the situation where the Subsidiaries would have committed themselves to be jointly and severally liable in the First Agreement.

As the Bruil-criterion also applies to the determination of a conflict of interests within the scope of the current conflict of interests rules under Section 2:239 paragraph 6 of the DCC, this judgment is relevant for the current practice. It serves as a reminder that in order to determine whether there is a conflict of interests, all relevant circumstances of the case should be taken into account.

Team

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