Leiden Law Blog

Managing director: stuck between a rock and a hard place?

Posted on by Maarten van Buuren in Private Law
Managing director: stuck between a rock and a hard place?

All managing (statutory) directors of legal entities in the Netherlands are obliged to comply with the same principle rule. Each managing director is responsible for fulfilling his (or her, naturally) duties properly, thus acting with ‘due care and attention’ (section 2:9 Dutch Civil Code). Should the director fail in this duty of care, the consequences may be personal liability for certain damages. Did the director act in the best interests of the company and its related enterprise? This includes all relevant stakeholders, including for instance the parent company.

This is a complex issue, very much based on facts. Numerous books and articles have been written on the topic. Yet it remains, especially in practice, something that is difficult to grasp. A Supreme Court ruling from three years ago, yet not well known, is illustrative in this respect.

We go back to 1 March 2013. The Dutch Supreme Court ruled in a tax matter, concerning a taxpayer and petitioner (a Dutch B.V.) that was  part of a group of companies. The taxpayer was a 100% subsidiary of a parent that entered into a credit facility agreement. The agreement was granted by a consortium of banks, and each group company was jointly and severally liable towards the banks for the whole loan. This included the taxpayer.

The taxpayer did not receive additional compensation from its parent nor any other group company for this guarantee. As it is, the company also benefitted, since the group benefitted and the company could use the funding. At some point in time the banks cancelled the loan, and the company was held liable. The tax question regarded the corporate tax deductibility of that loss.

The Supreme Court determined that co-signing and thus assuming group liability for a credit facility under the present conditions was ‘purely based on the corporate relations’. Engaging in such a facility, with joint and several liability for all group companies (including a right of recourse that was subordinated to the banks), was regarded as ‘a risk that an independent third party would not have taken’. The company might have arranged such a facility independently, according to the Supreme Court.

From a tax point of view I have no judgement on this, since it is not my expertise. However, from a civil law point of view the decision is fascinating since the managing director is now very much stuck between a rock and hard place:

On the one hand, his group and his parent company needed this facility. Further, a facility under these conditions could never have been obtained by the company itself. Finally, it was considered to be in the interests of the company and its enterprise, since it could draw on this facility which was good for business. So, not signing was not an option.

On the other hand, the Supreme Court with this ruling now tells company directors not to enter into such transactions, since they are only based upon the fact that the company forms part of group and thus forms an unacceptable risk for the company.

So, either the director does not act in accordance with the company and the group interest, or the director takes an ‘unacceptable risk’, which might very well lead to personal liability. Concluding: the director is ‘wedged’ between tax law and civil law.

The question is how to solve this business predicament? The group company director deserves clarity and perhaps even some simplicity on these matters. It would therefore help if decisions concerning both tax law and civil law would align more than was the case in the decision referred to above. Perhaps then such dilemmas for directors could  be avoided. Until then, legal advice is inevitable.

Add a Comment

Name (required)

E-mail (required)

Please enter the word you see in the image below (required)

Your own avatar? Go to www.gravatar.com

Remember me
Notify me by e-mail about comments