Destruction of legal acts by the receiver
Directors of troubled companies are usually aware that acts performed in the face of bankruptcy (if it comes to that) will be examined by a receiver. Unobligatory legal acts that have harmed creditors may be reversed by the trustee.
Liability to the estate
Directors are also usually aware that it is important to publish financial statements on time and have the administration in order. After all, failure to publish financial statements (on time) or not having proper records can lead to directors’ liability. In these cases, manifestly improper management is established and there is a legal presumption that this improper management is a major cause of the bankruptcy. It is then up to the director to make it plausible that the bankruptcy was caused by something other than manifestly improper management. If this fails, the director will be liable for the estate shortfall. This is regulated in Article 2:248 of the Dutch Civil Code.
Liability towards the tax authorities
Less well known is that the Tax Collection Act also contains a regulation that may lead to liability of the director for tax debts. Directors of commercial legal entities are jointly and severally liable for (among others) payroll and turnover tax debts of those legal entities if the non-payment of those tax debts is due to improper management. There is a legal presumption of improper management if the director has failed to make timely notifications of inability to pay. Notifications of inability to pay must be made by completing and submitting the form on the tax authorities’ website. The notification must be timely, i.e. made within 2 weeks of the day the taxes due are due. This liability is regulated in Section 36 of the Tax Collection Act.
Two regulations but slightly different
The regulation under the Invorderingswet is similar to the regulation under the Civil Code:
- if you, as a director, have not (timely) fulfilled the publication obligation or have not fulfilled the accounting obligation, the director is liable for the estate deficit.
- if, as a director, you have not reported a payment default in time, then you are liable for tax debts.
Yet there is an important difference. The director held liable by a receiver can negate the legal presumption of mismanagement by making it plausible that there were other causes of the bankruptcy. But the director who is held liable by the receiver must first pass an important hurdle; he must make it plausible that the failure to report the inability to pay on time is not attributable to him.
With few exceptions, this is an almost impossible task. In any case, you cannot defend yourself by arguing that you had another task within the board.
Only if you, as a director, succeed in making it plausible that the failure to report in time is not attributable to you, you will be given the opportunity to rebut the presumption of improper management. If the director cannot make it plausible that the failure to report in time is not imputable to him, he will not be given this opportunity, even if there were objectively other causes of the bankruptcy. Because of this strict rule, there is a sanction here for failure to report in time rather than a sanction for manifestly improper management.
Background
It is somewhat harder to imagine in this day and age that the penalty for failure to report has such a large effect but this regulation was introduced as an anti-abuse provision in a period before the computer age. In those days, it could take a long time for the tax authorities to know about late payments. Hence, the idea; the director himself should quickly report that there is an inability to pay so that the tax authorities can quickly take recovery action.
But now we are many years down the line and, thanks to automation, the tax authorities are quickly aware of late payments. The force majeure notification actually plays no role in this. So is it still reasonable to impose such a severe sanction on what is in many ways a minor offence?
Is Section 36 Recovery Act still of our time?
Although in practice the regulation is applied less often and less strictly than the text of the Act suggests, there is resistance to the regulation and the question is whether the regulation does not violate European regulations, more specifically the principle of proportionality. The Supreme Court has now asked the Court in Luxembourg whether the rule of Section 36 of the Tax Collection Act, under which a director who has merely failed to report a payment default on time and therefore can hardly escape liability for high tax debts, is proportionate. The answer to this question will take some time. Meanwhile, the legislator would do better to align this regulation with the presumption of improper management in case the company’s administration is not in order. This is an equal criterion that also applies to receivers. This might also prevent a concurrence in which a director is held liable by both a receiver and a receiver or, on the contrary, only by the one of these parties because it happens to be in a better evidential position.
Looking for an insolvency lawyer?
Would you like to know more about the notification of insolvency or the liability of a director in case of bankruptcy? Feel free to contact Rob Steenhoek of LVH Advocaten. He specialises in insolvency and corporate law and will be happy to help you.
