QUASI DIRECTORS UNDER DUTCH AND DUTCH CARIBBEAN LAW
The topic of my dissertation
I am regularly asked by English speaking people what my PhD-dissertation is about.
As part of my PhD, I researched the liability of persons who have not been appointed as director according to Book 2 of the Civil Code and the articles of association (formal, also de iure, directors) of a private legal entity, but who actually (de facto) acted as directors or as shadow directors. The de facto director and the shadow director fall in the category of quasi directors.
In my study, reference is made to Book 2 of the Civil Code of the Netherlands (‘BW’), as this reads with effect from 1 July 2021. In addition, reference is made to Book 2 of the Civil Code of Curacao (‘BWC’), as it reads with effect from 1 January 2021. Insofar as relevant here, this corresponds materially to that of the Netherlands.
The law of Curacao I discuss corresponds (materially and – almost – verbatim) with the Books 2 BW of Aruba and Sint Maarten, and the (joint) Book 2 BW of Bonaire, St. Eustatius and Saba (the BES Islands). If reference is made to the Civil Code of Curacao, what is noted also applies to the other countries and islands mentioned here. Surinam can be added to this list as soon as it has adopted its Book 2 BW.
Before I give a short summary of my conclusions, you will first find below a brief explanation of some of the concepts used. This is followed by an overview of the various categories of quasi directors.
Where below ‘good faith’ is mentioned, this only relates to the question of whether the respective person respected the management autonomy and is in good faith in that respect, or ignored or violated this autonomy and is in that respect not in good faith.
Where below the term ‘(completely) on his own authority’ is used, this means that the respective person for instance behaves like a director, but without any authority or legal basis. For instance, a ‘caretaker manager’* does have a legal ground for his acting (albeit not in Book 2 BW) and also the director who believes in good faith that his appointment is legally valid (provided the defect in his appointment resolution has not been detected), but not the shareholder who presents himself to third parties as a formal director of the company. That shareholder acts on his own authority.
[*The caretaker manager refers to the Roman law concept of ‘negotiorum gestio’. In Roman law, it concerned a person who acted on behalf of another person, without his asking and without remuneration, for instance, to defend a neighbour’s interests while the neighbour was away. In this book it refers to the benevolent interference with the management of a legal entity that has no (functioning) board, and without the caretaker being appointed as a formal director.]
I further point out that in this study the concept of ‘decisive influence’ is used many times. This relates to the power and the will to determine the policy (or a part of it) or have it determined or to perform management acts or have them performed. The term power means here the capacity to do something oneself (and also – as de facto director – to actually do) or to get (as the shadow director) something done by others (the formal management board), the latter under pressure or coercion or on the basis of agreements made.
The examples given below under each category only serve as illustrations. It will always depend on the assessment by the court, on the basis of the concrete facts and circumstances of the respective case whether the qualification of quasi director is justified.
De facto or actual director in good faith
This relates to a person who acts or behaves himself as a director, but is not a director by virtue of Book 2 BW and the articles of association.
Examples:
• A director who has been appointed on the basis of a resolution that turns out to be null and void, and who believes he has been lawfully appointed as a director.
• A director whose term of appointment has expired without being noticed.
• An executive committee (ExCo) that is organized in such a way that its members – whether or not they are members of the formal management board – jointly determine the policy.
• A person who as a ‘caretaker manager’ takes care of the management of a rudderless legal entity (negotiorum gestio).
De facto or actual director not in good faith
This relates to a person who acts or behaves arbitrarily without authorization (i.e., on his own authority) as a director, but is not a director by virtue of Book 2 BW and the articles of association.
Examples:
• A supervisory director who without authority enters into a legal act on behalf of the legal entity.
• A shareholder who is continuously present in the business or organization of the legal entity, behaves as the boss, conducts the talks with the bank, the tax authority and the suppliers and chairs the board meetings without being asked.
The de facto shadow director
This relates to a person who – not being a director by virtue of Book 2 BW and the articles of association – exerts such influence on the formal board (or on one or more of the formal directors) that (the majority in) the formal board feels compelled to act according to his wishes or instructions.
Examples:
• A shareholder who imposes excessive coercive will on the board.
• Employees who structurally enforce a certain policy by means of strikes and threats of strikes.
The formal shadow director in good faith
This relates to a person who – not being a formal director – has agreed in proper consultation with the formal board (or a majority of the formal directors) that his wishes will (in principle) be implemented.
Examples:
• The principal of a trust office that will act as the director of his company who has made (detailed) agreements with that office concerning the policy to be conducted.
• Shareholders of a family business, who are and are not partly active in it, who have made a large number of agreements with the formal board with regard to the strategy of the business for the short and long(er) term.
The formal shadow director not in good faith
This relates to a person who – not being a formal director – has made agreements with the formal board, resulting in the legal entity being used for criminal or shady matters.
Examples:
• A front man is the formal director of a legal entity which is going to be used for ‘collecting’ payments made by consumers which the latter believe is to buy something on an official website, but who are in actual fact dealing with the website of fraudsters. The fraudster is here the formal shadow director.
• A foundation is incorporated after which assets owned by the shadow director are contributed to that foundation in order to hide them from recourse by creditors or the view of the tax authorities. A friendly contact becomes the director.
The titular quasi director
This relates to a person who – not being a formal director – has agreed with (the formal board of) a legal entity that he will implement (independently) several or a large number of management tasks. This is a de facto director in good faith, albeit that this is treated separately as a frequently occurring phenomenon.
Examples:
• A branch manager with extensive powers.
• A titular business or office director with (practically) unlimited powers.
I will now go straight to the conclusions of my research. The following question came to mind during the research: Who actually bears the responsibility for the management of a private legal entity? In many cases, this involves more people than the formal directors. And following on from this are the more legal questions: Who should be held liable in the context of the doctrine of directors’ liability and who should be able to benefit from the high threshold (the serious reproach criterion)? And on which ground(s)? Solely on the basis of Book 2 BW and Book 2 BWC and the explanatory notes to their drafts these questions do not allow for a proper answer.
In my approach the characteristic of quasi directors is that they exert a decisive influence on the policy, therefore with the power and the will to do so, and perform management acts or have them performed. This is a vague criterion, and the court must determine whether this is met on the basis of the facts and circumstances of the concrete case. This criterion applies to all categories of quasi directors, therefore to those who appropriate management tasks completely on their own authorization and to those who are entrusted with managerial duties on the basis of an agreement or who, on the basis of agreements made with the formal board, exercise influence on the management duties.
The extent of influence on the board must be distinguished from the question of the legal basis on which that influence is exercised. In this connection concepts such as intention and (subjective) good faith play a role. For example, there are differences between a shareholder who exerts undue pressure on the board to get his way, one who uses a stooge in the context of committing criminal offences, the principal who makes agreements with the trust director about the exercise of the management duties, and the branch manager who, on the basis of agreements with the formal board, performs a large part of the management duties.
Whoever acts as the de facto director or as a shadow director makes a choice to do so. This choice means that the respective person becomes directly or indirectly involved in the management of the legal entity (exercises his influence). It applies to the de facto director who believes in good faith that he has been legally appointed, but whose appointment decision appears to be defective, that he has chosen to become involved with and to want to be responsible for the management of the legal entity. The ultimate effect of their actions is, in short, that they manage in the way they want, or that specific actions are performed by them or in accordance with their will, or that they participate in a general sense in decisions about the policy of the legal entity (an ExCo comes to mind), where it is possible that they voted against certain policy decisions. By accepting the role of quasi director, or with a view to adopting that role, they should also be considered to have accepted the framework of standards of Book 2 BW applicable to formal directors. The fact that they are equated with formal directors, primarily with regard to the doctrine of directors’ liability, ties in well with how they behave: as (direct or indirect) directors. In short: the choice that is made includes the positive, but also the negative consequences.
If it has been established by the court that a person has exercised such influence over the board that he is to be regarded as a quasi director and that he must be equated with a formal director, the question arises as to what that equation entails. When considering the principle that a person should not benefit from his own wrongful acts, a distinction can be made between quasi directors who have acquired this capacity in good faith and those who have not. A person who believes himself in good faith to be a formal director, while it later transpires that a defective appointment resolution has been passed, must if he is personally held liable on account of director’s liability, be able – like a formal director – to claim application of the serious reproach criterion. It follows from the law that a person who acts completely on his own authorization as a de facto director and thereby consciously violates management autonomy can be held liable on the basis of director’s liability, but that does not mean that it is logical or even justified that he should also be able to benefit from the high threshold for liability.
I defend the position that formal and quasi directors, when it comes to the question of assessing their acts and omissions with a view to (possible) personal liability, are not by definition equated in a material sense. In my approach it is possible that there is/are persons or legal entities which do qualify as quasi directors but which cannot successfully invoke the serious reproach criterion. In other words: in that case there is not a complete equation of quasi directors with formal directors.
With regard to the internal standard for managerial behavior, I defend the position that it applies not only in relation to the legal entity but also towards third parties, and that it is not only aimed at formal directors, but is also meant for all kinds of quasi directors. In all cases where managerial acts and omissions are assessed, that assessment must take place on the basis of the same basic standard. It follows from the nature of the standard that this cannot be restricted to the formal directors. The standard must be deemed to be aimed at anyone who manages the legal entity directly or indirectly.
With regard to the (managerial) duty of care I defend the position that this not only rests on the formal directors but also on all kinds of quasi directors. The duty of care of the formal board refers to a careful management of the legal entity as a whole. The duty of care is not limited for instance to appropriate maintenance of the buildings and taking out a fire insurance. It means a careful ‘management’ of the legal entity with regard to its rights, obligations, liabilities and assets. The duty of care forms part of the obligation to properly exercise the management duties. And therefore this standard is also aimed at quasi directors.
With regard to the principle of collegiality, I defend the position that in all cases in which there is a multi-member board, even if it involves a combination of formal and quasi directors or a combination of only two or more quasi directors, this principle should be the starting point. Managing is a joint responsibility. Even if a legal entity is misused for criminal activities, this does not mean that the framework of standards that applies to directors would not apply.
With regard to management obligations (in particular the obligation to keep accounts and prepare annual accounts), I defend the position that this rests on the de facto director who acts more structurally as if he were a director and whose acts are not limited to a few specific matters, but who is more generally busy with the management. A clear boundary between the case in which management obligations do and do not rest on a quasi director cannot be given, but those obligations will in principle not rest on those who have only acted as such for a short time. Under certain circumstances, the obligation to keep accounts and prepare annual accounts may also rest on the formal and the de facto shadow director not in good faith. As an example, I mention the case where the formal shadow director is responsible for the appointment as a formal director of a person who is not at all capable of properly performing the director’s duties in this respect, or who has agreed with that person (which in the case of criminal activities is not inconceivable) that deliberately no accounts are kept. In both cases it is obvious to assume that in that event the obligation to keep accounts and prepare the annual accounts (also) rests on the formal shadow director not in good faith, so that (already on that ground) in the event of bankruptcy the presumptions of evidence can be invoked against him.
With regard to the high threshold for liability (the serious reproach criterion applicable to formal directors), I defend the position that the de facto director not in good faith (the person who completely on his own authorization takes the seat of the board), the formal shadow director not in good faith (the person who uses a stooge or front man) and the de facto shadow director (the person who as a shareholder pushes through his will) cannot claim application of the serious reproach criterion if they are held liable for management acts by the legal entity or the trustee in bankruptcy or by a third party. The argument is that they intentionally violate (in any event) the management autonomy (determined by law or the articles of association). Their acts violate the law and as such must be considered wrongful, and they should therefore not benefit from a high threshold for liability.
Karel Frielink
(attorney / advocaat)
(9 November 2021)
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