Article 2:247 of the Dutch Civil Code contains the so-called ‘requirement to record in writing’: a written record must be made of legal acts between a limited liability company (‘BV’) and its sole shareholder in cases where the company is represented by this shareholder. An exception is made for legal acts which, ‘under their stipulated terms, are within the ordinary course of business of the company’. In day-to-day practice this requirement is usually not complied with and this can have unfortunate consequences for the particular shareholder.
The underlying reason for this requirement is the possibility that creditors could be disadvantaged: with a one person company, there is a lurking danger that the sole shareholder could undertake legal acts to his own advantage which are to the detriment of the company’s creditors. This not only involves documenting in writing the legal acts between the company and its sole shareholder when this individual represents the company in multilateral legal acts (contracts, for instance) but also unilateral legal acts by the company with respect to the sole shareholder (for example the cancellation of a debt).
But it is not only the sole shareholder who is also a director under the articles of association who must abide by this regulation, this also applies for a shareholder who acts on the BV’s behalf on grounds of a power of attorney or on grounds of the representative authority that the law confers on the (person of the) shareholder: after all, it is stated that the BV is represented by this shareholder. This could for instance involve the appointment of a director on grounds of Article 2:242 of the Dutch Civil Code. By extension, the requirement to record in writing does not apply if the company does indeed have the same shareholder-director, but is being represented by a different person (or authorised representative) in the particular case.
The law does not stipulate anything about how and when the written record must be created. The legal act may be recorded in the minutes of the shareholder meeting, for instance, or this record may even be made after the fact. It must be noted here, however, that the written record must be ‘adequately specific’ so that it is clear what precisely was agreed between the parties involved and when this agreement took place: there must be actual consensus between the parties.
What is considered the ‘ordinary course of business’? In general, it is assumed that this criterion is less broad than the objects clause contained in the BV’s articles of association. Specifically the judge looks mainly at the actual activities of the BV. In that context, if it cannot be determined, or only with some difficulty, whether an activity falls within the ordinary course of business, the judge will first test whether the legal act was entered into under the usual terms (the ‘stipulated terms criterion’).
If the requirement to record in writing has not been satisfied, the legal act is subject to annulment. Only the company itself (and not the possibly disadvantaged shareholder) can invoke this. Particularly in situations where a BV has become insolvent, Article 2:247 of the Dutch Civil Code can play a role and the receiver will take action on the company’s behalf. In that case the receiver will have to demonstrate the BV’s interest in having the legal act annulled. Annulment can take place either inside or outside of court; a period of 3 years applies during which the legal act can either be invoked or – after the fact – confirmed. Annulment has a retrospective effect to the moment at which the legal act was performed and can result in the shareholder having an obligation to undo the act, something which is often no longer possible in practice, which means damage compensation becomes owed. There can also be directors’ and officers’ liability on grounds of Article 2:9 of the Dutch Civil Code.
In short: if you are the sole shareholder, always be alert to the fact that you must adequately record in writing all legal acts that you perform (in any capacity whatsoever) on the BV’s behalf with yourself as the counterparty, so that reliance on Article 2:247 of the Dutch Civil Code has no chance of success. It is recommended that you review periodically whether any such legal acts have been performed.