The Dutch BV: Protection, Pitfalls and Director Duties

The besloten vennootschap (BV, or private limited company) is the most popular legal entity for businesses in the Netherlands. The promise is appealing: limited liability, tax advantages and a professional appearance. But the BV is not a magic shield. Those who do not know the rules — or worse, ignore them — may be held personally liable for the company's debts. In this article, mr. Vulto discusses the key legal aspects of the BV structure.

Limited Liability: When Does It Work?

The foundation of the BV is limited liability. In principle, the shareholder is only liable up to the amount of their contribution. The debts of the BV are debts of the legal entity, not of the director or shareholder personally. That is the theory.

In practice, however, there are important exceptions. Limited liability is pierced where there is improper management (Article 2:9 DCC), a tortious act by the director (Article 6:162 DCC) or manifestly improper management in insolvency (Article 2:248 DCC). In the latter case, each director is jointly and severally liable for the entire deficit in the insolvency.

Director Duties: The Accounting and Filing Obligations

The law imposes a number of specific duties on the director of a BV. The two most important are the accounting obligation (Article 2:10 DCC) and the filing obligation (Article 2:394 DCC). The accounting obligation requires that the administration be maintained in such a way that the rights and obligations of the BV can be ascertained at all times. The filing obligation requires that the annual accounts be filed with the Chamber of Commerce within twelve months after the end of the financial year.

Non-compliance with these obligations has far-reaching consequences. In insolvency, there is a rebuttable presumption that the management manifestly failed in its duties if the accounts are not in order or the annual accounts were filed late. The burden of proof is then reversed: the director must demonstrate that the insolvency was not caused by their mismanagement. In practice, this is virtually impossible.

The Beklamel Standard: Entering into Obligations with Knowledge

One of the most common grounds for director liability is the Beklamel standard. This standard holds that a director is personally liable if they enter into obligations on behalf of the BV while knowing or reasonably should have known that the BV would not be able to fulfil them and would offer no recourse.

Consider a director who, shortly before an impending insolvency, places large orders with suppliers knowing that the BV will never be able to pay the invoices. The supplier may then hold the director personally liable on the basis of tort. It is therefore crucial that directors maintain a realistic picture of the BV's financial position and raise the alarm in good time.

The Shareholders' Agreement: Essential with Multiple Shareholders

Where a BV has multiple shareholders, a shareholders' agreement is indispensable. The articles of association regulate the basic structure, but a shareholders' agreement goes much further. It records agreements on:

• Decision-making: Which decisions require unanimity? Think of investments above a certain amount, entering into loans or changing the strategy.
• Dividend policy: When and how much dividend is distributed? This prevents disputes after the fact.
• Lock-up and transfer: A lock-up period prevents a shareholder from selling their shares during the start-up phase. Offer mechanisms (tag-along and drag-along) protect minority shareholders.
• Deadlock resolution: What happens when the shareholders fundamentally disagree? A Russian roulette or Texas shoot-out clause provides a way out.

Without a shareholders' agreement, you are dependent on the statutory dispute resolution procedure (Article 2:335 et seq. DCC) in the event of a conflict. This procedure is costly, time-consuming and uncertain in outcome. Prevention is better than cure.

Dividend Distribution and the Distribution Test

Since the introduction of the Flex BV in 2012, the law includes a distribution test (Article 2:216 DCC). The board must approve a dividend resolution by the shareholders. The board may only refuse approval if it knows or reasonably should foresee that the BV will be unable to pay its due debts after the distribution.

If the board approves a dividend distribution that causes the BV to run into payment difficulties, the directors are jointly and severally liable for the shortfall caused by the distribution. Shareholders who received the distribution while they knew or should have known the BV would run into difficulties must also repay the amount received. The distribution test is therefore not a formality but a serious directorial responsibility.

Group Structures and the 403 Declaration

Many entrepreneurs work with a holding structure: a personal holding company that holds shares in one or more operating companies. This structure offers protection by ring-fencing the risks of operational activities in the operating company from the private assets in the holding.

Within group structures, the 403 declaration plays an important role. By issuing a 403 declaration, the parent company assumes joint and several liability for all debts of the subsidiary. In return, the subsidiary is exempt from publishing its own annual accounts. This saves costs and prevents competitors from gaining insight into the operating company's figures.

The risk is considerable: the parent becomes liable for all debts of the subsidiary, including future obligations. Withdrawal of the 403 declaration is possible, but subject to strict conditions. Creditors must be given the opportunity to lodge an objection. It is therefore important not to issue a 403 declaration lightly and to periodically evaluate whether the declaration remains desirable.