Violation of the Dutch Beklamel criterion by directors of a bankrupt construction company?
A company is in principle liable for its own debts. This is an essential principle of Dutch company law. But that does not mean that directors can perform legal acts on their company’s behalf entirely risk-free. Certainly not if the company is in financial hard times. If a director concludes a contract on their company’s behalf, knowing that the company cannot (no longer) fulfil it, the director may be held liable for any ensuing losses. Dutch corporate law lawyer Hidde Reitsma explains the Beklamel criterion.
Judgment in the Netherlands on directors’ and officers’ liability
The Arnhem-Leeuwarden Court of Appeal recently delivered an interesting judgement on directors’ and officers’ liability. The dispute concerned the question whether the directors of a bankrupt construction company could be held liable towards two duped creditors.
Dutch construction company to compensate losses
The creditors in question had concluded a building contract with the construction company concerning a roof. After completion of the works, a severe storm caused extensive damage to the roof construction. The construction company was held liable by the creditors but did not carry out any repairs. The construction company was ultimately ordered to pay € 30,000 in legal proceedings.
Bankruptcy on own petition
The construction company filed for bankruptcy. The insolvency practitioner stated in their first bankruptcy report that there had been a loss-making situation for some years. The trustee paid an amount of approximately € 1,000 to the creditors. The creditors then held the construction company’s directors liable. They argued that the directors knew or should have known that the construction company would not be able to meet its (financial) obligations towards the creditors. They referred to the fact that the construction company had considerably negative equity.
High threshold directors’ and officers’ liability in the Netherlands
The Court of Appeal stated first and foremost that in principle only a company itself is liable for non-fulfilment of its obligations. A high threshold applies to the liability of its directors. Directors may be held liable if a director has acted on the company’s behalf or has caused or permitted the company not to fulfil its legal or contractual obligations.
What is the Dutch Beklamel criterion?
More specifically, a director’s liability can be assumed if they, when taking on an obligation, knew or should reasonably have understood that the company would be unable to fulfil its obligations and not provide redress. This is called the Beklamel criterion.
Violation of the Beklamel criterion?
In this matter, the Dutch Court of Appeal considered the following. It was clear that the company had considerable negative equity at the time of concluding the contract and had incurred a loss in the year prior to the contract. The existence of negative equity and the suffering of losses does not mean that the point has been reached where it is irresponsible to continue the business and to enter into further commitments with third parties. However, this fact alone is not sufficient to conclude that the directors knew or should have known that the company would not be able to fulfil its obligations under the contract and could not provide any redress for the ensuing losses.
Dutch lawyer in cases concerning directors’ and officers’ liability
The Court of Appeal then stated that when assessing the moment at which the contract was concluded, attention must also be paid to, for example, the order book, market developments, credit facilities, and so on. These circumstances were not raised further by the creditors. Therefore, their claim against the director was rejected.