Miss Etam bankrupt due to improper management

A hearing took place on 14 March between Miss Etam’s receiver and Martijn Rozenboom. He had taken over the company with the promise of getting it back on track financially. Yet Miss Etam went bankrupt. Now the receiver accuses Rozenboom of improper management and on that basis holds the director liable. The questions that can be asked are: what is improper management and is it the case here?

What does improper management entail?

As a director of a BV, it is crucial to be aware of the various situations in which directors’ liability may arise. Articles 2:10 jo. 2:248 of the Dutch Civil Code emphasise the duty of directors to keep administrative records, while article 2:394 of the Dutch Civil Code regulates the duty to publish annual accounts. In principle, the burden of proof lies with the trustee, where it must be proved that improper management led to bankruptcy. But legal presumptions of proof when the company has failed to comply with the publication obligation regularly put directors in an awkward position. The trustee’s lawyer reports that at Rozenboom there is no written agreement or present invoice, only oral records.

This creates the presumption of proof that the bankruptcy was due to improper management. This improper management includes not keeping proper records. Under such a presumption of proof, the director is free to provide contrary evidence. Rozenboom argues that the bankruptcy is due to the 2020 coronomy measures.

Foreign directors

As many Dutch companies operate internationally, having a foreign director is not unthinkable. This adds an extra dimension to the issue of directors’ liability in bankruptcy. This is because it is more difficult to establish and enforce the liability of foreign directors. Rozenboom worked for a Swiss B.V., which in turn is the director of the Dutch company, making him a foreign director. The difficulty in liability lies with the doctrine of incorporation. This means that the law of the country where the B.V. is incorporated applies.

If the foreign legal system does not have a similar provision to Dutch law, liability cannot automatically pass to the director of the foreign legal entity. Therefore, it is sometimes advised to have a foreign company act as a director to reduce the risk of directors’ liability and/or at least complicate matters. Of course, in such a case, it is important to take note of the jurisdiction in which one takes up residence.

How does a director avoid liability

Failure to comply with legal obligations can lead to suspicions of mismanagement and is considered a major cause of bankruptcy. A simple but crucial step for directors is to publish financial statements on time and report payment defaults to the tax authorities. This is especially true when the B.V. is unable to pay tax, contribution or pension debts. Failure to make this notification may result in board liability.

In addition to complying with legal obligations, careful decision-making is essential. Directors must be extremely careful when approving and implementing decisions, such as dividend payments (Article 2:216 of the Civil Code). Prior to such decisions, a thorough financial analysis should be carried out to ensure that the BV can continue to meet its obligations. Documenting and arguing decisions is another important step to avoid liability. By carefully documenting all decisions and considerations, proof of the decisions taken can be provided in retrospect and it can be refuted that there has been mismanagement.

Intentionally bankrupt?

It is naturally assumed that when a company is bought virtually bankrupt, the aim is to save it. In any case, that is what Rozenboom attempted. Yet it seemed he had other plans and things did not turn out as most employees at Miss Etam had thought and hoped. The employees are demanding that Rozenboom recognise them as an official and serious interlocutor. This is because they suspect Rozenboom is deliberately harming the company.

Over the past two years, Miss Etam’s shops performed reasonably well. In 2019, they made almost 19 million euros in profit on sales of over 100 million euros. A year earlier, profits were more than 17.5 million euros on sales of almost 93 million euros. However, the Miss Etam Services division, which provided consultancy services and personnel and administrative services, made a loss of almost 16 million euros during the period.

Conclusion

Directors’ liability of a BV in bankruptcy is a complex legal issue, which becomes even more complicated when foreign directors are involved. It is essential for companies to be aware of potential risks and challenges in this area, and to take proactive measures to limit directors’ liability. Do you have questions about board liability or the role of foreign directors or any other question? Then contact one of our lawyers by mail, telephone or fill in the contact form for a free initial consultation. We will be happy to think along with you.