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Claiming compensation from your director (under the articles of association) who is residing abroad? Know which court to go to

Claiming compensation from your director (under the articles of association) who is residing abroad? Know which court to go to

It is well-known that legal proceedings are not constrained by national borders. It is for that reason that within the European Union there are two regulations setting out which court has jurisdiction within the EU in particular cross-border proceedings. In respect of all legal claims brought before 10 January 2015, the Brussels I Regulation applies. For all legal claims brought on or after 10 January 2015, the new Brussels I bis Regulation applies.

The case

That the correct application of the Brussels Regulations can obstruct an approach currently accepted in Dutch case law followed from the proceedings between director Spies and the Dutch company Holterman Ferho Exploitatie B.V. (hereafter: ‘Holterman’). The case was as follows. Spies, who resides in Germany, was appointed as director/manager at Holterman based in Markelo (Netherlands) in 2001. In addition, Spies held 15% of the shares in Holterman. The legal position of a director of a company such as Spies is often twofold in such a case. The director has a corporate (also referred to as functional) and a contractual relationship with the company on the basis of an employment contract or, as I have set out in my article of 15 May 2017, on the basis of a management agreement. The relationship between Spies and Holterman ended in 2006. As Holterman was of the view that in the performance of his position Spies had made serious errors, Holterman summoned Spies before the District Court in Almelo (Netherlands) in order to obtain compensation. Holterman hedged its bets by basing its claim primarily on director’s liability (article 2:9 Dutch Civil Code), alternatively on employee’s liability and therefore on breach of the employment contract (article 7:661 Dutch Civil Code) and, as a second alternative, on an unlawful act (article 6:162 Dutch Civil Code).

In respect of such proceedings, the view in Dutch case law is that a claim on the basis of director’s liability of article 2:9 Dutch Civil Code by a Dutch company against its director can be viewed as a legal claim on the basis of an obligation from contract in the meaning of article 5(1) Brussels I (and article 7(1) Brussels I bis Regulation). When invoking these articles, irrespective of the question which court has jurisdiction to hear the claims that arise from the employment contract, in addition to the court of the place of residence of the director, the place where the director must perform his obligation to carry out his proper duties always has alternative jurisdiction, meaning in principle the court in the place where the company has its registered office. In the event of a claim against a director who is residing abroad, in the Dutch approach, the company therefore has the choice of court in two different countries.

Lack of jurisdiction

Despite this well-known approach in the Netherlands, Spies took the view, on the basis of the still applicable Brussels I Regulation at the time, that the District Court in Almelo and Dutch courts in general did not have jurisdiction to hear Holterman’s claims as he resides in Germany.

Proceedings relating to the jurisdiction of the Dutch court are often litigated on right up to Hoge Raad (Supreme Court), the highest judicial body in the Netherlands. The Supreme Court subsequently requested preliminary rulings from the highest court in the European Union, the European Court of Justice, to obtain clarification. The most important question from the Supreme Court was whether in cases such as the current one, where the director is not only sued on the basis of the improper performance of his duties or an unlawful act but also as an employee pursuant to his employment contract, article 5(1) Brussels I Regulation and article 7(1) Brussels I bis Regulation apply. This because the Brussels Regulations contain a special arrangement (articles 18-21 Brussels I Regulation and articles 20-23 Brussels I bis Regulation) for claims arising from employment contracts, which means that an employer can only bring proceedings against its employee before the court of the place of residence of the employee.

European Court of Justice

On 10 September 2015, the European Court of Justice replied to the Supreme Court and firstly considered that the special arrangement in the Brussels Regulations relating to employment contracts only applies if Spies was tied to Holterman as employee by an individual obligation under the employment contract in the meaning of the Brussels Regulations.

To answer this question, the Court of Justice stated that an autonomous interpretation of the terms ‘individual obligation from employment contract’ and ‘employee’ must be used. The interpretation given in nationally applicable law to the term ‘employment contract’ is irrelevant. Only the autonomous European interpretation of ‘employment contract’ leads to applicability of the special arrangement relating to obligations from an employment contract. In order to determine whether on the basis of the European interpretation there is an employment contract, it must be verified whether the relevant person has during a particular period of time carried out work for and under authority of the company for payment for another under its authority.

In specific terms this meant that the Court of Justice had instructed the Dutch court to verify whether Spies had, as director and manager of Holterman, during a specific period of time carried out work for payment for and under the authority of Holterman and if there was a long-term relationship as a result of which Spies occupied a particular position in the company of Holterman. For the question whether work had been carried out ‘for and under the authority of’ the company, the Court of Justice indicated that in cases such as the current one, in which Spies is also shareholder of Holterman, the size of the share capital could play a role.

Should on the basis of the autonomous interpretation the national court rule that the relevant person against whom the claim has been brought had been bound to the company as employee by an individual obligation under an employment contract in the meaning of the Brussels Regulations, it applies that the special jurisdiction rules of articles 18-21 Brussels I and articles 20-23 Brussels I bis Regulations exclusively apply. Even if the claim was also, or primarily, based on director’s liability or on an unlawful act and the Brussels Regulations indicate a different court with jurisdiction for these claims.

Although the Court of Justice answered more questions from the Supreme Court, the above consideration is the greatest eye-opener for Dutch legal practice. With the considerations of the Court of Justice in mind, the Supreme Court gave a final ruling on 3 February 2017 in the proceedings between Spies and Holterman.

The Supreme Court

In its final ruling, the Supreme Court stated that in the case of Spies there was indeed an employment contract as referred to in the Brussels Regulations. The circumstances taken into consideration by the Supreme Court were: (i) the fact that the relevant employment contract had been made part of the proceedings, (ii) that this showed that agreements had been made on salary, bonus and days’ holiday, (iii) the established fact that Spies was not permitted to carry out other paid work and (iv) that the employment contract showed that Spies must comply with the written directions of the general meeting of shareholders. As Spies only held 15% of the shareholding, the Supreme Court ruled that Spies was for the greater part dependent on the directions from other shareholders and that therefore there was a relationship of subordination. Although the Supreme Court does not address this issue, I deduce from this consideration that no relationship of subordination would have existed if Spies had been Director and Major Shareholder of Holterman.

The conclusion of the Supreme Court was – in line with the ruling by the Court of Justice – that as there was an employment contract in the meaning of the Brussels Regulations, only the German court has jurisdiction to hear the claims. The lack of jurisdiction was therefore rightly raised by Spies and the standard Dutch approach offering the company a choice could not be upheld.

The lesson

The above ruling shows that care and attention must be paid if a company wants to sue its director who is living abroad. In such cases, before bringing a claim before a Dutch Court, always have a lawyer with knowledge of international private law determine whether in the specific case the Dutch court has jurisdiction or whether the case must be brought in the country where the director resides.

By Lotte te Linde

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