 This article discusses how to ensure that your Dutch subsidiaries do not contaminate the parent company with liabilities in times of financial crisis.

As a result of the global economic downturn and the ongoing changes to the financial environment, corporate legal firewalls are even more important. In deteriorating business markets, creditors, financial institutions and the tax authorities will be looking for ways to secure their rights. In that respect, failure to comply with Dutch corporate law can result in criminal and civil liability. To help avoid exposure of your Dutch subsidiaries, their directors and contamination of your parent company, we have produced a short list of issues that you should be aware of. All of these issues can be easily dealt with to avoid unnecessary risk.

CONVENE AN INSOLVENCY GENERAL MEETING
The board of Dutch public limited liability companies (NVs) must convene a general meeting of shareholders to address the appropriate measures to be taken pursuant to Dutch corporate law. This must be done within three months following their presumption that the company’s share capital has decreased to an amount that is the equivalent of, or lower than half, of the paid-up and called share capital.

Consequences and remedies

First, not convening an extraordinary general meeting required by law will grant every individual shareholder the right to request the summary proceedings to issue an authorisation to convene a general meeting. This could be regarded as an act of mistrust and may accordingly cause substantial negative publicity for your company.

Secondly, failure to comply can contribute to the judgement of mismanagement of the board and possibly the parent company if financial control takes place at the level of the parent company. If mismanagement is established, directors – including shadow directors and all who exercise legal/factual control over the company, such as majority shareholders – can be held personally liable.
To remedy this issue the share capital and reserves should be carefully monitored at entity level and a general meeting should be convened, ultimately within the time frame required by law.

REPORT TO THE SUPERVISORY BOARD

The board of directors of an NV or private liability company (BV) is under a legal duty to provide its supervisory board with all the information as may be required to enable the supervisory board to fulfil its task of supervision. The board of directors must, at least once a year, inform the supervisory board on the outline of the company’s strategy, financial risks and control systems.
Consequences and remedies

If the board of directors does not duly and timely provide the supervisory board with the information mentioned above and, in substance, not have structured such ‘control’ processes, this may constitute mismanagement. As mentioned already, mismanagement can result in the personal liability of directors towards the company (internal), but also towards creditors (external). To avoid such exposure, the board of directors should actively report to the supervisory board and make sure that the supervisory board is informed on strategy, financial risks and control systems at least once a year.

MIND THE FISCAL UNITY JOINT AND SEVERAL LIABILITY

If a parent company situated in the Netherlands possesses the legal and beneficial ownership of at least 95% of the shares of one or more subsidiaries, the companies may under certain conditions enter into a fiscal unity for the purpose of corporate tax. Only the Dutch holding company will receive a tax assessment for the unity as a whole.
Consequences and remedies

Fiscal unities provide many advantages, varying from fewer administrative formalities, to intra-group compensation of losses and the possibility of shifting assets for restructuring without tax consequences. However, a drawback of the fiscal unity is the joint and several liability of all of the members of the unity for taxes owed by the unity. In times of financial crisis, the joint and several liability may lead to contamination of the parent company if the subsidiaries that are part of the unity become insolvent. As a consequence, the parent company cannot take recourse for the taxes owed by the subsidiaries.

The remedy, to protect the parent company from liability, is to act timely if members of the fiscal unity are becoming less solvent. This may require additional security to be provided by the subsidiaries or ending the fiscal unity.
KEEP THE CORPORATE VEIL DOWN
The board of a Dutch parent company is under a legal duty to exercise supervision over its subsidiaries. Failure to do so may result in the establishment of mismanagement. On the other hand, case law also shows that active and intense control over a subsidiary by virtue of its position as a controlling majority shareholder may expose the parent company to liability towards the creditors of its subsidiaries.
Consequences and remedies

An important and risky time frame for the parent company commences when a subsidiary is rapidly becoming less solvent. From that moment, the parent company should take into account the interests of the subsidiary’s creditors. This can be done by promptly warning the creditors that the subsidiary will most likely not be able to (completely) perform its obligations or by requesting a suspension of payments. The parent company should also avoid creating an image of credit-worthiness of the subsidiary by any expressions or acts towards its creditors. In addition, the parent company should refrain from acts that reduce its risk as a creditor of the subsidiary and increases the risk of other creditors. For example, by selective payments to the parent company, or by granting extra security to the parent company. Failure to take these foregoing rules into account can result in lifting the corporate veil by means of which creditors can take recourse against the parent company.
FILE THE ANNUAL ACCOUNTS

The board of a Dutch NV or BV must draft the annual accounts every year within five months after the end of the financial year. This term may only be prolonged with a period of six months at most, in the case of special circumstances. The extension must be granted by shareholders’ resolution. The foregoing means that the annual accounts must be drafted within 11 months from the end of the financial year. Consequently, the annual accounts should be adopted by the general meeting of shareholders within two months of that. In case the accounts are adopted, they must be published and filed with the Trade Registry within eight days from adoption. In any event, the accounts must be published and filed within 13 months from the end of the financial year.
Consolidated accounts: 403 exemption for group companies

Companies that are part of an international group may, under certain strict conditions, be exempt from filing their annual accounts in accordance with the relevant provisions of the Dutch Civil Code. This allowance is known as the ‘403 exemption’. If the exemption applies, the subsidiary does not have to file independent annual accounts according to Dutch corporate law. Basically, this means that no independent accounts have to be published within the statutory period of 13 months. Preparation (not publication) of a very basic balance sheet and profit and loss statement of the company will suffice.

There are multiple conditions to the 403 exemption. We will highlight two of greater importance:

- A consent statement (instemmingsverklaring) from the company’s shareholders, stating that they agree with the exemption, must be filed with the Trade Registry within the period of the beginning of the financial year and the annual meeting in which the company’s accounts are adopted.
- A legal entity incorporated under the laws of an EU member state that has consolidated the company’s financial statements must have issued and promptly filed a joint and several liability undertaking with respect to the company’s legal acts. The terms of the undertaking must be carefully drafted to meet the required level of liability.
Consequences and remedies

Accounts are often not published and filed within the statutory time limits described above and, in the case of the 403 exemption, the conditions are regularly not met by companies invoking the exemption. This results in a breach of the obligation to publish the company’s annual accounts and could lead to both criminal and civil liability of directors and other shadow directors, such as parent companies that are actively involved in the policy of its subsidiaries. First, a breach of Dutch corporate law is a criminal offence. Secondly, in the unfortunate event that the company goes bankrupt, the trustee will have a very strong case in favour of creditors who want to collect their claims by taking recourse against the company’s (shadow) directors. For that purpose, the trustee is supported by an irrefutable presumption of law of mismanagement of the directors. Personal liability of a (shadow) director towards creditors is only an inch away.

Summary

To avoid civil and criminal liability, the accounts should be filed within the time limits set out above and, if applicable, the conditions to the 403 exemption should be fulfilled.
By Ferdinand Mason, partner, and Jordi van Borssum Waalkes, lawyer,
 in the corporate/M&A department,
 Boekel De Nerée.

E-mail: ferdinand.mason@boekeldeneree.com; jordi.vanborssumwaalkes@boekeldeneree.com.
Boekel De Nerée is a leading independent Dutch law firm of advocaten and civil law notaries. Based in Amsterdam, we offer specialist advice to clients in a wide range of industries. Our corporate practice includes an Anglo-American advisory group specifically geared to serving the interests of clients from English-speaking parts of the world, providing clients with peace of mind when dealing with matters in the Dutch jurisdiction.


