Directors’ and officers’ liability in The Netherlands: the Beklamel standard

At the time that a director or officer commits a company to an agreement, while he is reasonable aware that he cannot comply with this agreement, this director or officer can be held liable for any loss. This problem was recently addressed in the court of Maastricht (The Netherlands). Dutch contract lawyer Marco Guit discusses the ruling.

Company purchases accounts receivable portfolio

In this case, a lawyer practising in Maastricht (in the south of The Netherlands), who was also a director of a law firm, sold an accounts receivable portfolio to a company, Infomedics in Almere. These types of transactions, where claims on third parties are purchased and sold, are also called ‘factoring’ (although factoring usually refers to type of financing based on accounts receivable and a third party – the factor or the factor company – arranges the collection of those accounts receivable). The nominal value of the package of accounts receivable was €150,000.= in total, Infomedics would pay a purchase price of €40,000.=. The difference between the nominal value and the purchase price is usually in the assessment of the default risk by the purchaser and the costs expected to be incurred by the purchaser to collect the accounts receivable.

Purchaser of accounts receivable doesn’t pay purchase price

Apparently, the director of the law firm needed money urgently, because he applied substantial pressure to obtain prompt payment. After repeated requests by the director, Infomedics paid €20,000.= in good faith as an advance payment, before the portfolio had even been delivered. However, this faith was shaken, because only days afterwards it was discovered that the court in Maastricht had pronounced the bankruptcy of the law firm of Libotte & Diederen Advocaten.

Receiver is entitled to breach of contract

Infomedics was left empty-handed. The payment of €20,000.= was included in the assets The assets of a Dutch company reflect the value of all that the company possesses
» Meer over assets assets of the bankrupt company. The receiver failed to comply with the purchase agreement. Although in principle a bankruptcy has no consequences for the existence of an agreement and the resulting obligations, the receiver cannot be compelled to actually comply with the agreement. It is stated that the receiver is entitled to breach of contract. Infomedics could submit its claim for reimbursement of the €20,000.= to the bankruptcy, but that did not mean that they had a right to be paid. Infomedics holds the lawyer who received the purchase price as director personally liable, based on a wrongful act. The Infomedics claim was based on the Beklamel standard that was developed in case law.

Directors’ liability in The Netherlands: the ‘Beklamel standard’

The ‘Beklamel standard’ is a standard for directors’ liability in The Netherlands. The standard was developed in case-law (and is named after the case in which is was formulated at first). It means that a director can be held liable based on a wrongful act (tort), at the time that he, on behalf of the legal entity, enters into an agreement with a third party, whilst he knew or should have known that the legal entity cannot comply with the obligations from this agreement and that the legal entity offers no opportunity of recovery. In that case, the director of that company shall be held liable for the loss suffered by the third party.

Director is liable under Dutch law

The court of Maastricht found that the director of the law firm had knowingly not informed Infomedics of a circumstance that – almost certainly – would have prevented Infomedics from complying with (part of) its obligations. The fact that the director of the law firm put pressure on Infomedics to transfer the money (in all likelihood to make a payment to the party filing the bankruptcy at the last minute) led the court of Maastricht to conclude that such actions are contrary to the generally accepted standards of due care. The director of the bankrupt law firm was ordered to make a private payment of the € 20,000.= and was also sentenced to pay the court fees.