There is a legislative bill before the Dutch Senate now that provides for director disqualification under civil law – disqualification for a maximum of five years from service as director under the articles of association of a legal person. The disqualification is seen as an important instrument for combating bankruptcy fraud, serious irregularities in or around a bankruptcy (for example obstruction of the bankruptcy trustee), recurrent bankruptcy and prejudicing creditors prior to a bankruptcy. The director disqualification would, the bill states, promote “a fair trading climate”. However, it is emphasised that this concerns an exceptional penalty and imposing it will not be a matter of routine after a bankruptcy is pronounced. Of course, the court has discretion to make the last call in this respect.
The idea behind the director disqualification is that directors who have proven to be a bad apple cannot engage in trade temporarily, or at least not with the protection of limited liability afforded by a legal person. It works both ways – a party wishing to exclude their own liability must be acting in good faith, the original idea behind the introduction of legal personality which has been at jeopardy of becoming forgotten.
More specifically, when director disqualification is imposed, it temporarily keeps the person being penalised from managing a legal entity (newly established) or from being attached thereto as a supervisory board member (disqualification cannot be imposed on the supervisory director him or herself – it is a director disqualification). The disqualification can be imposed on (former) directors under the articles, but also (former) decision-makers without such formal status. This is done to prevent the ban from being circumvented by the use of straw men or by a strategic resignation. Moreover, the director disqualification does not go so far that the person being penalised can no longer establish a sole proprietorship or general partnership anymore – those that are not legal persons remain outside of the scope of the rule. The legislature found that otherwise the possibilities of providing for one’s own income would be disproportionately restricted. In addition, the person being penalised does remain personally liable in those corporate forms, so this would not be a case of someone hiding behind a legal entity.
The civil court can impose the disqualification at the request of the public prosecutor or in response to a claim by a bankruptcy trustee. A director disqualification can, in short, be based on the following grounds: a) established directors’ and officers’ liability in respect of bankruptcy (see Art. 2:138/248 Dutch Civil Code), b) repeat bankruptcies (two bankruptcies in which the person in question has been the subject of a personal accusation), c) acting fraudulently to the considerable prejudice of creditors, d) committing certain fiscal offences and, finally, e) the serious neglect of duties of cooperation and information provision vis-a-vis the bankruptcy trustee. It is a closed system of grounds.
The court is also granted some discretion in whether or not to impose a director disqualification. Factors that the court may consider include, for example, the nature of the conduct that gave rise to the establishment of directors’ and officers’ liability, the manner in which and degree to which creditors have been prejudiced and the manner in which the duties of providing cooperation and information to the bankruptcy trustee are violated. The court also determines the duration of a director disqualification once imposed (as mentioned: up to five years). Furthermore, the court may – after other legal entities with which the director was involved have given their views – decide in exceptional cases that the person concerned can remain the director or supervisory director after all at those other legal entities. Of course, that will be easier if the legal person at which irregularities have occurred does not have any ties with those other legal persons. Within a group structure, that will be difficult to demonstrate.
The director disqualification results in the striking of registration from the Trade Register as authorised director and supervisory director at all legal entities where someone is involved as such, unless the court has determined otherwise. Also, the disqualification results in civil law notaries and the Chamber of Commerce refusing to cooperate with the establishment or registration of new legal entities by someone to whom a director disqualification or supervisory director disqualification applies. It is important for enforcement that once director disqualification has become final and binding, it will be recorded in a list kept by the Chamber of Commerce that can be consulted by anyone.
The list will comprise the primary source of information for civil law notaries, businesses and consumers regarding director disqualifications. A disqualification will not be included on the list until after the ruling containing the order thereto has become irrevocable. This prevents the situation that a director successful contests the director disqualification on appeal, but in the meantime is already unfairly listed. A director disqualification that has become irrevocable is stated on the list until the court-ordered expiration date. After this date, the director disqualification will no longer be publicly accessible.
At least that is the theory. In practice, the bill raises various questions. Take the private company, as the most common example. The bill includes language about an ‘impediment’ against acting as a director – the person in question can no longer represent the company, the minister said. That comment seems to indicate that the person in question is not automatically discharged from the director position. The shareholders will accordingly have to take a separate resolution to that effect. In the legislative history one can also read however that after imposing a disqualification a legal person “can end up without a director” which indicates that the director in question is indeed fired from the director position, without requiring an underlying resolution by the shareholders. We think the latter interpretation is more likely, because otherwise it can be left to the whims of the shareholders whether a director is actually discharged from his or her position as director. That does not seem to be the intent; the disqualification is supposed to apply no matter what the shareholders think of it.
A follow-up question is whether the director disqualification not only means the end of the position of director, but also an end to the employment contract that many directors have now. The Supreme Court ruled in 2005 that the end of the connection under corporate law entails the end of the employment contract, but that concerned a resolution by the shareholders themselves (or the director him/herself) – so it was not about a court-ordered dismissal from the director position. That is an important distinction: the shareholders’ meeting may not agree with the imposed director disqualification and may still want to keep the person in question on board, whether or not as director. An automatic end of the employment contract does not fit with this. People will probably want to amend the employment contract because it was written with a view to the position as director. It seems to us that invoking changed circumstances at work could succeed and a change based on good employership and employeeship (Art. 7:611 Dutch Civil Code) has great chances of success. Something similar applies if the appointment turns out to be void because a disqualification has been ordered: what happens in that case to the employment contract? It is theoretically valid, but can be amended. Here, too, a reason will likely have to be found for dismissal. One might even consider including a suspensive or resolutive condition in the employment contract, stating that this contract only takes effect once it has become clear that no director disqualification applies or even terminates as soon as the director disqualification takes effect.
But what if the shareholders want to get rid of the ex-director in the meantime? No business is sitting and waiting for bad press. How do they terminate the employment contract in that case? A shareholders resolution is no longer possible, because the director position has already been ended by the judicial ruling. The company will have to separately terminate the employment contract, and will have to find traction in the system of grounds contained in Art. 7:669 Dutch Civil Code. The e- and h- grounds loom as possible grounds. What is, in our view, an inconvenient new rule in the Dismissal Resolution is that the employer is required to find new job placement for the former director (not with the e ground), possibly within another part of the group of companies. It would not be strange for the director to be exempted from these rules.
All in all, this rule was drafted with good intentions and will certainly result in rogue directors no longer being so easily able to leave behind a trail of destruction, but the relationship between the rules for appointment and dismissal under corporate law and employment law do not seem to have been thought through sufficiently. If it is left to the legislator, the court will have to solve that problem.