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Directors’ liability of a second-degree director: piercing the corporate veil 2.0

Directors’ liability of a second-degree director: piercing the corporate veil 2.0

On 17 February 2017, the Supreme Court delivered an important judgement stating that Article 2:11 of the Dutch Civil Code (the piercing of the corporate veil liability to the natural person behind the legal person-director) applies in all cases where a legal person in its capacity of director is liable on the basis of the law. This means that in order to establish liability of a director of a legal person-director, there is no additional requirement that the natural person behind the legal person-director must also be attributed sufficiently serious personal blame.

Piercing the veil of corporate liability to the eventual director

Article 2:11 of the Dutch Civil Code determines that a legal person’s liability as a director of another legal person also rests jointly and severally on those who had been a director of such at the time the liability of the legal person arose (the so-called second-degree director). This continues until the last director has been reached. The second-degree (or as many degrees as applicable) director is, eventually, a natural person.

This is a form of ‘piercing the corporate veil’ that intends to prevent natural persons from being able to avoid director’s liability through the interposition of a legal person-director.

We already knew that Article 2:11 of the Dutch Civil Code redirects all forms of director’s liability in Book 2 of the Dutch Civil Code to the second-degree director. This can include liability on the basis of Article 2:9 of the Dutch Civil Code (improper performance of one’s duties) and Article 2:138/248 of the Dutch Civil Code (joint and several liability of directors in the event of bankruptcy).

This means that in principle there can also be (joint and several) liability of the second-degree director without it being apparent that serious blame can be personally attributed to him.

The legal question at issue in the current proceedings was whether this redirection also takes place in the event of director’s liability on the basis of Article 6:162 of the Dutch Civil Code (unlawful act).
In literature, there was to date a difference of opinion on the question whether Article 2:11 of the Dutch Civil Code can also be used to redirect director’s liability on the basis of Article 6:162 of the Dutch Civil Code to the second-degree director.[1]

In an earlier case, which lead to the judgement of the Supreme Court of 23 May 2014[2], the Supreme Court unfortunately did not address this question as in that case the receiver had not claimed determination of liability of the indirect director. However, there was now an opportunity to provide clarity.

Factual background, District Court and Court of Appeal

The South African company Le Roux exports grapes. In that context, it has an agreement with Dutch company Hyka B.V. The director of Hyka is Holding Kampschöer B.V. (‘the Holding’). Brothers Willy and Fred Kampschöer are its directors.

Apparently, Hyka forged particular documents leading to financial disadvantage for Le Roux. Although Hyka’s liability for compensation was established at law, a bankruptcy prevents the compensation payment.

Le Roux subsequently holds both the Holding and Willy and Fred Kampschöer liable as second-degree directors. The District Court ruled that Holding and Willy can be attributed sufficiently serious personal blame. The Holding’s liability is passed on to Willy via Article 2:11 of the Dutch Civil Code. The District Court ruled that it was not established that Fred could also be attributed serious personal blame.

On appeal, Le Roux argued that Fred is also ‘automatically’ liable in view of the operation of Article 2:11 of the Dutch Civil Code. The Court of Appeal[3] did not agree with this and ruled that liability of a second-degree director still required that sufficiently serious blame can be attributed to him personally. The Supreme Court ruled differently.

The Supreme Court

In the current case, the Supreme Court finally got the opportunity in its judgement of 17 February 2017 to answer the question whether the redirecting of liability to the second-degree director also occurs if there is director’s liability pursuant to Article 6:162 of the Dutch Civil Code (unlawful act) and, in addition, whether serious personal blame is required for this.

The answer to the first question was positive and the answer to the second question was negative.
The Supreme Court considered:

‘It follows neither from the text, nor from the rationale of Article 2:11 of the Dutch Civil Code that a limitation was intended to apply Article 2:11 of the Dutch Civil Code on one or more statutory bases of directors’ liability. This interpretation of Article 2:11 of the Dutch Civil Code corresponds with the statement by the Minister of Justice during the parliamentary debate on this provision that it is not clear to him why liability pursuant to (now) Article 6:162 of the Dutch Civil Code towards creditors and liability pursuant to (now) Article 2:9 of the Dutch Civil Code would be excluded and that these statutory liabilities can be compared to those of Articles 2:138 and 2:248 of the Dutch Civil Code […].

A director of a legal person-director who pursuant to the statutory provision from which liability arises has a ground for exculpation to fend off the claim, can rely on this independently from the legal person-director […]. Whether a statutory provision from which liability arises offers the option of exculpation, must be determined by the interpretation of this provision.

It follows from the above that Article 2:11 of the Dutch Civil Code applies to all cases in which a legal person, in its capacity as director, is liable pursuant to the law. This also includes liability of a legal person-director based on Article 6:162 of the Dutch Civil Code. This liability then also rests jointly and severally on all those who at the time of the inception of the liability of a legal person-director was a director of such. This means that to establish liability of a director of a legal-person director, there is no additional requirement that the creditor asserts and, if necessary, proves that serious blame can be personally attributed to this director.

It does, however, follow from the nature of the director’s liability on the basis of Article 6:162 of the Dutch Civil Code that if a legal person-director is liable on that basis, a director of this legal person-director can (as yet) avoid liability on the basis of Article 2:11 of the Dutch Civil Code by asserting and, if necessary, proving, that serious blame cannot be personally attributed to him for the conduct on which the liability of the legal person-director is based. This division of the burden of proof does justice to both the rationale of Article 2:11 of the Dutch Civil Code and to the requirements for director’s liability pursuant to Article 6:162 of the Dutch Civil Code.

From the considerations above it follows that the complaint is effective. The irrevocably established liability of the Holding as the director of [Hyka B.V.] towards [Le Roux] pursuant to Article 6:162 of the Dutch Civil Code […], rests pursuant to Article 2:11 of the Dutch Civil Code also jointly and severally on [Fred], subject to him asserting and, if necessary, proving, there are circumstances on the basis of which the conclusion is justified that serious blame cannot be attributed to him personally.

Noteworthy is also that in his Opinion to the judgement, Advocate General Timmersman observed that Le Roux did not have an interest in its interim remedy relating to the current issue. The Advocate General applied incorrect reasoning in this. He determined that the Court of Appeal had rejected the liability of Kampschöer based on an unlawful act. As a view eventually had to be given on his liability pursuant to an unlawful act via the route of Article 2:11 of the Dutch Civil Code, the Advocate General was of the opinion that the submitted plea stranded on the previous ruling by the Court of Appeal.

This is not correct, as appears from the judgement of the Supreme Court; the mere fact that direct liability of the second-degree director on the basis of an unlawful act has been dismissed does not detract from the fact that he is in principle ‘automatically’ jointly and severally liable via Article 2:11 of the Dutch Civil Code if the first-degree director is held liable.

Conclusion

Article 2:11 of the Dutch Civil Code also redirects liability pursuant to Article 6:162 of the Dutch Civil Code (unlawful act) to the second-degree director. For the establishment of liability of a director of a legal person-director this means that there is no additional requirement that the natural person behind the legal person-director must also be attributed serious personal blame.

The second-degree director who pursuant to the statutory provision from which the liability arises has a ground for exculpation to fend off the claim, can rely on this, independently of the legal person-director. Whether a statutory provision from which liability arises offers the option of exculpation, must be determined by the interpretation of this provision.

It does, however, follow from the nature of the director’s liability on the basis of Article 6:162 of the Dutch Civil Code that if a legal person-director is liable on that basis, the second degree director can (as yet) avoid liability on the basis of Article 2:11 of the Dutch Civil Code by asserting and, if necessary, proving that serious personal blame cannot be attributed to him in respect of the conduct on which liability of the legal person-director is based.

In short: if a legal person-director is liable pursuant to Article 6:162 of the Dutch Civil Code, each of its directors is in principle also jointly and severally liable unless serious personal blame cannot be attributed to him in this respect.

By Daan Baas

[1] Positive: Huizink, GS Legal Persons, Article 11, note 5 and Asser/Maeijer, Van Solinge & Nieuwe Weme 2-II* 2009/476; negative: Wezeman, diss. (1998), p. 371 and Lennarts, diss. (1999), p. 263-164
[2] JOR 2014/229
[3] Please also see the interesting case notes below the judgement of the Court of Appeal: JOR 2014/3 with case note from Prof. Bartman and legal expert Van Leeuwen, and JIN 2014/8 with case note of legal expert Van der Kraan

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