Who does what in a private limited company (BV) during financial difficulties?
When a BV is in financial difficulties, the duties and powers of the company bodies change. This blog discusses these duties and powers, and those of the (prospective) administrator. Structure companies (structuurvennootschappen) are not considered here.
The executive and supervisory boards
In both good times and bad times outside of bankruptcy, the board represents the BV, determines the BV’s strategy and manages and disposes of the company’s assets. In bankruptcy, the administrator becomes exclusively responsible for the management and disposition of the BV’s assets. Furthermore, the board retains its powers.
The supervisory board supervises the management board’s policy and assists the management board with advice. Furthermore, the supervisory board can be granted additional powers in the articles of association and should be informed in writing by the management board at least once a year about the strategy, general and financial risks and the management and control system of the BV, so that the supervisory board can properly perform its function. In financially difficult times, the supervisory board should intensify its supervision. In bankruptcy, this intensity decreases again because of the appointment of the receiver.
In performing their duties, both management board and supervisory board members should be guided by the interests of the company and its affiliated enterprise. This means that management board members and supervisory board members should not take part in decision-making if they have a personal conflict of interest with the company. In financially difficult times, management board members and supervisory board members should take greater account of the interests of creditors; after all, there is a risk that creditors will not be paid. For example, if management board members or supervisory board members know or ought to know that the company cannot continue to pay its due debts after a profit distribution, they risk liability for improper performance of duties and, moreover, management board members may be jointly and severally liable for the shortfall in the company’s assets caused by the profit distribution.
The shareholders (meeting)
In principle, the shareholders’ meeting has the power to appoint or dismiss managing and supervisory directors, amend the articles of association, adopt the financial statements and decide on the dissolution, merger, demerger and/or conversion of the BV. In addition, the shareholders’ meeting has a right to information vis-à-vis the management board and the supervisory board and statutory powers (mandatory or otherwise) and all powers not assigned to other company bodies, within the limits set by law and the articles of association. When exercising these powers, the shareholders’ meeting should in principle take the corporate interest as its guideline, due to its capacity as a corporate body and its limitation by the rules of reasonableness and fairness.
Individual shareholders basically have control rights; meeting rights, agenda-setting rights, convening rights and voting rights. In principle, these rights remain in full force in financially difficult times. However, certain rights can be temporarily set aside, e.g. the pre-emptive right in the event of an issue or the profit right. This sometimes happens in cases of emergency financing. The extent to which shareholders should take corporate interests into account when exercising their rights in financially difficult times will be discussed later in this blog series.
The works council
The entrepreneur who maintains a company employing at least 50 people must establish a works council; a form of employee participation in which employees can indirectly influence company policy. The works council has an advisory right on major decisions and their implementation (with the possibility of appeal) and an advisory right on the appointment/dismissal of directors (without the possibility of appeal, although non-compliance can lead to the conclusion of “mismanagement” at the Enterprise Chamber). In addition, the works council has the right of consent on various proposed decisions to adopt, amend or revoke certain regulations. All powers remain in place during financial difficulties. In the pre-pack, even under the new Article 363(4) WCO I, the court can make the appointment of a prospective receiver conditional on the prospective receiver informing the works council.
Although the works council is not formally considered a corporate body within the meaning of Article 2:189a of the Dutch Civil Code, the prevailing doctrine is that the works council has to abide by reasonableness and fairness just like formal corporate bodies. Since the works council represents the interests of the employees employed by the company, the works council will therefore have to take into account the interests of the (company and its affiliated) company when exercising the aforementioned powers.
The (prospective) liquidator
When a BV is heading for bankruptcy, a prospective administrator may be appointed before bankruptcy. This is a person who is given the task in the Continuity of Enterprises Act I (WCO I) of looking after the interests of the company’s joint creditors. The prospective administrator is not an adviser or supervisor and does not have to follow instructions from (the board of) the BV. However, the prospective administrator does seek a solution to the BV’s financial problems together with the board of the BV outside bankruptcy.
If a suitable solution cannot be found, the prospective administrator prepares the bankruptcy, taking into account the interests of the joint creditors as much as possible. If the bankruptcy is declared, the task of the administrator is to manage and liquidate the bankruptcy estate, and to ascertain whether irregularities led to the bankruptcy, made the liquidation of the bankruptcy estate more difficult or increased the bankruptcy deficit.