Identification only under exceptional circumstances

Identification only under exceptional circumstances

Unfortunately, it often happens that a creditor misses the boat because the debtor keeps their assets in a legal entity. The debtor may be liable, but because the collateral assets are lodged with the legal entity, the creditor is left empty-handed. In the Netherlands, in such a case the creditor may rely on the doctrine of identification. However, the current case-law is that this appeal is accepted only in exceptional circumstances. A recent Dutch ruling by the Supreme Court illustrates this. Dutch contract lawyer Onno Hennis explains the judgement.

 

USD 1.2 million in damages by an employee involved in fraud

This case involved an employee in the Netherlands, who had committed substantial fraud in the course of his duties. The damage caused as a result were valued at approximately USD 1.2 million. The employer wished to recover this amount from the employee. The employee, however, turned out not to have any assets to call upon. That was because, even before the fraud was discovered, he had placed his most important asset – a (residential) villa on St Maarten – in a special foundation without receiving a purchase price for it. The foundation managed the villa in a form of trust-ownership, but carried out no activity itself.

Foundation of the employee sued for collateral asset extraction

The foundation was actually and economically entirely in the hands of the employee. The employer claimed for the reasons given above that the employee had used the foundation only as a front to make the claim by the employer (on his villa) impossible. For that reason, the employer sued the foundation – in addition to the employee – and demanded a payment of USD 1.2 million. The employer relied, among other things, on identification of the foundation with the employee.

What does the principle of ‘legal personality’ entail?

Netherlands law is based on the principle of legal personality: a legal person is a subject of law with its own rights and obligations. This means that the foundation is not liable for the debts of the employee. Furthermore, the legal entity, in this case the foundation, has separate assets. Creditors of the employee can, therefore, in principle not make a claim on the assets of the foundation for debts of the employee.

Breakthrough of liability on the basis of identification

In some circumstances an exception can be made to the principle of legal personality. In that case a ‘breakthrough of liability’ occurs. One of the forms of breakthrough of liability is identification. Identification assumes that certain obligations and behaviours of a particular (legal) person can be allocated to another (legal) person. That will be the case when a (legal) person, who has full control over multiple legal entities, exploits the identity difference between them.

Identification only under exceptional circumstances

In line with existing case law (the Rainbow judgement) the Supreme Court considered that the foundation (which was ‘abused’ for the collateral asset extraction) can in principle be independently liable for damage caused by the collateral asset extraction. However, a claim for identification is only lawful under ‘exceptional circumstances’. The Supreme Court ruled that in this case there were no such circumstances, because the damage caused by the fraud could not be equated with the damage caused by the extraction of collateral assets. In such a case, an exception to the principle of legal personality, according to the Supreme Court, would go too far in holding the foundation liable for the damage resulting from the fraud.

AMS Advocaten: giving advice on collateral asset extraction

It can be seen from the Dutch judgement by the Supreme Court how tricky it can be to actually have a claim paid. AMS Advocaten are happy to provide advice and support when your debtor tries to impede enforcement of your claim. It is important in that case not just to have the right basis for your claim, but also to determine a (process) strategy. For advice please contact AMS Advocaten.

Onno Hennis - Advocatenkantoor AMS Advocaten
Onno Hennis At AMS Advocaten Onno focuses on corporate and commercial litigation. He advises clients on various legal issues in the areas of company law, contract law and tort. Follow Onno also on Google or LinkedIn. Onno is available via e-mail and +31 (0)20-3080315.
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