Litigating on behalf of a company: a legal pitfall?
Under company law, a legal entity can participate independently in legal transactions. This implies, among other things, that a company can conduct legal proceedings. However, conducting proceedings on behalf of a company requires careful compliance with both internal decision-making rules and rules on external representation. It may sound like a minor detail, but it can make the difference between an admissible claim and a painful rejection by the court. A recent ruling by the Limburg District Court on 18 December 2024 illustrates this.
The case: internal management dispute
In the case in question, two shareholders, who were also directors of a company, got into a conflict. One of them instructed a lawyer to assist her in her capacity as a shareholder. The lawyer then drew up a summons, not only on behalf of her client personally, but also on behalf of the company itself.
The defendant, i.e. the other director, rightly objected to this. The defendant argued that the company’s claims were inadmissible, as no legally valid decision had been taken to initiate proceedings. After all, the lawyer had been engaged by only one director, while the articles of association stipulated that the board was only authorised to act jointly. The other director had not granted power of attorney.
What went wrong?
The court made a clear distinction between two aspects:
1. External representation
External representation concerns acting on behalf of the company towards third parties, such as engaging a lawyer. According to the articles of association, both directors had to act jointly. In this case, only one director instructed the lawyer.
However, this did not lead to inadmissibility, as an appeal on the grounds of unauthorised representation under Section 2:240(3) of the Dutch Civil Code can only be made by the company itself.
2. Internal decision-making
Internal decision-making concerns the taking of decisions within the board, such as initiating legal proceedings. This is where things went wrong. The company’s articles of association stipulated that a board decision had to be taken by an absolute majority of votes of all directors entitled to vote. If a director has a conflict of interest, as was the case here, the decision must also be taken by the general meeting of shareholders (GMS). In this case, no board meeting had been held at all, let alone a board decision, nor had a GMS been convened. The court therefore ruled that the company’s claims were inadmissible due to the lack of a legally valid internal decision.
And what about the lawyer?
A striking detail in this ruling is that the defendant is also a director and shareholder of the company and, naturally, does not want the company to bear the legal costs. The defendant therefore requested the court, pursuant to Article 245 of the Dutch Code of Civil Procedure, to order the plaintiff’s lawyer to pay the legal costs. This was because the company did not appear in court in a legally valid manner, as an unauthorised co-director acted on its behalf and gave the instruction to bring legal proceedings. The court granted this exceptional request.
Practical implications
This ruling emphasises that directors must be aware of the formal requirements when initiating proceedings on behalf of the company. Failure to comply with the rules laid down in the articles of association can have far-reaching consequences, including inadmissibility and personal liability for legal costs.
If a director wishes to initiate proceedings against a fellow director, but the articles of association require joint decision-making, the conflict of interest rule may offer a solution. If it is established that the other director has a conflict of interest, he or she may not participate in the decision-making process. The decision can then be validly taken by the competent body, for example the general meeting of shareholders.
For further information on the conflict of interest provision, please refer to the article by our colleague Mr De Vries: “Conflict of interest: breaking through blockages within the management”.
Prevention is better than cure
Conflicts within companies are more common than you might think, especially when there are two (equal) shareholder-directors. Are you considering legal proceedings on behalf of your company? Or are you involved in a conflict within the board? Mr F. A. Alkilic specialises in corporate law and procedural law and will be happy to assist you with expert advice and guidance. Please feel free to contact us for an exploratory meeting.
