The Arnhem-Leeuwarden Court of Appeal recently handed down a ruling on the liability of an accountant for advice on a group structure. Can an accountant (in this case it concerned an accountant, but it also applies to other advisors) be liable to bankruptcy creditors as a result of the advice he provided to the bankrupt company?
Advising on the establishment of an inherently risky group structure
The accountant advised a client. As a result of this advice, a group structure was created, with a production company in which all costs (purchase of materials, rent, personnel) were incurred without any assets being available for recovery. These assets were owned by other group companies and were leased from these other group companies. In addition to the production company, a sales company was also established. This sales company realized all sales to third parties, whereby only the materials produced by the production company would be sold. The source of income for the production company therefore consisted exclusively of the orders it would receive from the sales company. The sales company only had to pay a market price once it had received payment from the end customer. Ultimately, the production company went bankrupt and the debts in that production company remained (partly) unpaid. The trustee took the position that this was the result of the accountant’s advice. The recommended structure was inherently so risky that bankruptcy was inevitable.
Liability for debts?
How does it work again?
A private limited company is a legal entity and, in principle, creditors can only recover their claims from the assets of that legal entity. In exceptional cases, a director may be liable to creditors on various grounds, for example if he has caused a company within the group to be unable to meet its obligations because recoverable assets have been withdrawn. The trustee has argued that the special duty of care that a director has towards the company’s creditors can be extended to the advisor who provides the director with advice that entails disproportionately high risks for the creditors, whereby the advisor also knows that his advice will be implemented.
But can a third party, in this case the accountant who advised the director, also be liable to those creditors?
Standard for professionals
The standard for the liability of a professional (such as an accountant) is that he must exercise the care of a good contractor towards his client. An accountant can be expected to exercise the care that can be expected of a reasonably competent and reasonably acting professional. If an accountant’s advice falls within this standard, he is not liable to the creditors. Only in special circumstances can advice given by the accountant to the company (his client) also constitute a wrongful act (directly) towards the creditors, if that advice can be qualified as a wrongful act towards those joint creditors. In such a situation, a trustee may hold the accountant liable on behalf of those joint creditors.
As long as an advisor takes on the care of a good contractor and his advice is within the bounds of what may be expected of a reasonably competent and reasonably acting professional, he will not easily reach the high threshold of liability to creditors.
The court of appeal assesses the advice on the basis of the standard. Like the district court, the court of appeal believes that the chosen group structure is by no means unlawful. Separating assets in one group company and production in another group company is a structure that occurs much more frequently. Advice to set up a group in this way is therefore not advice that cannot be expected from a reasonably competent and reasonably acting professional. So no liability for the accountant.
The trustee had also raised other issues that led to the company’s bankruptcy and the lack of recourse for creditors. However, it was not established that these issues had been advised by the accountant. In any case, it was not clear that the accountant’s advice had such a significant influence that it determined the company’s policy. There was no evidence of specific advice from the accountant that made the bankruptcy inevitable.
In these proceedings, the outcome was favorable for the accountant. After the court initially rejected the trustee’s claim, the court of appeals upheld that ruling. Nevertheless, accountants (as well as other advisors) must be aware that their advice is not without obligation. Advice given to clients must meet the standard of care that may be expected of a reasonably competent and reasonably acting professional. If this is not the case, the accountant may also cause the company (his client) to commit a wrongful act (directly) towards the creditors, if that advice can be qualified as a wrongful act towards those joint creditors.
Looking for a corporate law attorney?
Would you like to know more about liability in bankruptcy? Feel free to contact Rob Steenhoek of LVH Advocaten. He specializes in insolvency and corporate law and will be happy to assist you.
