Double roles in attributing knowledge
The knowledge of a person who in fact runs a company can be attributed to the company if the sole director and shareholder is a 'straw man', the Supreme Court confirmed in a judgment of 29 March 2019. The rules by the Supreme Court are not revolutionary or even new. But circumstances essential for the attribution of knowledge are ignored. The double role played by the 'man in charge' raises questions about how to apply the rules as identified by the Supreme Court to the facts
In 2012 and 2013, B&J Adviseurs B.V. (B&J) made several payments to a foundation. The payments were designated 'donation' or 'donation for building Mandir'. A mandir is a Hindu temple; according to its website and flyer, the foundation had already bought property to realise such a temple. However, this property had been transferred to B, the supervisory director of the foundation. This meant that, if the mandir were built, it would become B's private property.
B&J is a consultancy firm for accountancy and tax. It is run by J, a nephew of B. J's brother-in-law is the sole director and shareholder of B&J, but he appears to have been nothing more than a straw man. J officially acted as a self-employed worker, but presented himself as B&J's managing partner and had an e-mail account at B&J.
J also happened to be a statutory director and the treasurer of the foundation when the donations were made. Subsequently however, he fell out with his uncle and stepped down. B&J then annulled the donations on the basis of error, stating that it would never have donated the money had it known that B would become the private owner of the mandir. The foundation, however, stated that J knew that the property had been transferred to B, in person, when the donations were made. After all, he was the foundation's treasurer at the time. The court case revolved around the question whether J's supposed knowledge of the transfer to B in person can be attributed to B&J.
Attribution of knowledge to legal entities
Knowledge can be attributed to a legal entity on two grounds:
- the person in the know is an agent of the legal entity or has apparent authority to represent the entity (article 3:66(2) Dutch Civil Code, combined with article 3:61(2) in case of apparent authority);
- according to common perception, the person's knowledge qualifies as knowledge of the legal entity (based on case law).
These rules are explained in the PhD thesis I published on this subject 2017; it is extensively quoted in the advocate-general's conclusion. The advocate-general notes (3.14.2) that the B&J case is what I refer to as a 'reliance case': the ultimate question is whether the foundation legitimately relied on B&J to know what J knew.
The Supreme Court's findings
The Supreme Court held that if the foundation's statements that it legitimately expected J to be authorized to represent B&J are correct, J's knowledge may be attributable to B&J. Moreover, the foundation's statements with regard to J's role within the company may entail that his knowledge qualifies as B&J's knowledge according to common perception.
But what about the foundation's knowledge?
The Supreme Court's general findings are in line with its previous case law, but one remarkable aspect of the case is not dealt with at all. The foundation can only have relied on J's representative authority, or on J having shared his knowledge with B&J's director, if it did not know the actual facts. The foundation supposedly relied on B&J to know what J knew when accepting the donations - but whose knowledge must count as the foundation's knowledge at the time of acceptance of a donation? Who else notices receipt of the donations in the bank statements, and who else is able to return the payments (which is the only way to avoid acceptance of a donation under article 7:175(2) Dutch Civil Code) but the foundation's treasurer? In other words: J.
For that reason, one would expect the courts involved to have also considered the attribution of J's knowledge to the foundation. If the foundation knew what J knew, it is difficult to imagine how can the foundation can have relied on anything when accepting the donations. Reliance presupposes a lack of knowledge, but here, J knew whether or not he was authorised to represent B&J and to what extent he acted on behalf of B&J (i.e. whether J in fact made the payments on behalf of B&J – the case remains unclear about this). Such a constellation of facts leaves no room for reliance on apparent authority. J also knew whether and to what extent he was involved in B&J's decision to make the donations. If he was involved, the foundation cannot have relied on B&J to know what J knew – it will simply have known. This would, in turn, imply that B&J could only invoke error if the straw man director independently decided to make the donations.
Although the facts suggest that J's knowledge should not only be attributed to B&J, but also to the foundation, neither the court of appeal, nor the advocate-general or the Supreme Court give any attention to this issue, meaning their considerations will never be known. It would appear that neither of the parties invoked the subject, leaving little room for findings in cassation proceedings.
For more information on this subject, please contact Branda Katan.