In a previous article, I wrote about the risks associated with an inherently risky structure. By distributing a company’s assets and activities across various group companies, there is a risk that a creditor will have little or no recourse for debts.
Recently, the Court of Appeal in The Hague issued a ruling on the question of whether recourse may be frustrated by the transfer (“reallocation”) of activities by one group company to another group company.
Background
Customs broker Eurotransit is performing services on behalf of logistics company Ahlers. In doing so, Eurotransit handles the customs declaration for the import of certain goods for a client of Ahlers. By mistake, an incorrect commodity code is used, resulting in insufficient import duties being collected initially, and the tax authorities impose a back tax assessment of €1.3 million on Eurotransit. Based on the Fenex terms and conditions, Eurotransit claims the amount of the back tax assessment from its client, Ahlers. This takes place in 2005.
Following this incident, a restructuring takes place within Ahlers’ company. Ahlers’ activities and assets are transferred to LV Ahlers, a group company within the Ahlers group. LV Ahlers and Ahlers have the same directors. After this transfer in 2005, no further activities take place within Ahlers.
Lengthy legal proceedings follow, but in 2013, the Court of Appeal in The Hague orders Ahlers to pay Eurotransit €1.5 million in damages. Ahlers cannot pay this amount because all assets were transferred and operations ceased in 2005. A few months later, the company Ahlers is even completely dissolved. Eurotransit is left empty-handed. Eurotransit does not give up and sues (the board of) LV Ahlers for frustration of recovery; the transfer of operations within the group, leaving Ahlers empty and no longer offering any recourse for Eurotransit’s claim.
LV Ahlers’ Liability for Impeding the Ability to Seek Redress
Eurotransit held LV Ahlers (and its board) liable for wrongful acts, and the court granted Eurotransit’s claim for damages. An appeal was filed against this ruling. In the appeal proceedings, the focus was on the issue of “frustration of recourse”—the obstruction of recourse options after an obligation has arisen.
Administrative discretion
The court finds that, taken on its own, the group’s decision—following the separation from Ahlers—to transfer operations to a new company rather than continue them within the existing company cannot be regarded as a tortious act against Eurotransit. The court finds that a restructuring falls within the group’s freedom of organization. The board may exercise that freedom, even if there was the threat of a claim by Eurotransit. This is the starting point.
However, what may be required of the board in this context is that, when transferring significant assets, the value of those assets be determined correctly, for example through an appraisal by external experts. The value thus determined must, certainly if the activities are terminated, subsequently remain available to the creditors. The value could, for example, have been set aside. Ahlers did not do so.
The Ahlers board knew or should reasonably have known that the transfer of the activities would result in Ahlers being unable to fulfill its obligation at all and thus offering no recourse. Although the obligation toward Eurotwist was in dispute, the board had to take its existence seriously into account. By failing to take this into account, they are seriously at fault. The fact that the claim was disputed by Ahlers at the time of the transfer of activities and had not (yet) been established in court does not alter this. LV Ahlers must compensate Eurotwist for the damage suffered as a result of the unlawful conduct.
Damage
With liability having been established, things seemed to be turning out well for Eurotransit. But nothing could be further from the truth. The court had assessed Eurotransit’s damages at 1.3 million euros. However, due to “contributory negligence” on the part of Eurotransit, a 50% reduction was applied. This reduction for contributory negligence was imposed because the court held that Eurotransit was itself to blame for the lack of recourse. Eurotransit had the opportunity to secure recourse. Eurotransit failed to do so, thereby taking a risk itself, and that risk materialized. Thus, instead of full compensation, Eurotransit is only entitled to 50% of the damages. Things get even worse for Eurotransit at the court of appeals. The court questioned the value of the assets and operations transferred by Ahlers to LV Ahlers in 2005. The court had the damages assessed by experts. With the help of experts, the court determines that the damages resulting from the frustration of recovery amount to only €132,147. That was the value of the transferred assets in 2005, and that amount should have been set aside in 2005 so that Eurotransit could (still) recover its losses from it.
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.
