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CORPORATIONS AND THEIR ALTER-EGOS UNDER THE LAWS OF THE NETHERLANDS ANTILLES (I)

Reverse pierce of the corporate veil?

In some countries if a corporation is to be regarded as the same or the alter ego of its shareholder, then the corporate or tax law authorizes a reverse pierce of the corporate veil, meaning that the corporation can be liable for the debts of its shareholder.

If Netherlands Antilles law were to apply to such a case (the corporation is the alter ego of its shareholder), then the general rule is that a shareholder in a limited liability company (NV or BV) is not personally liable for the liabilities of such company and need not contribute to any losses incurred by the NV/BV save up to the contribution (consideration) as mentioned in the instrument for the share issue. Vice versa the same general rule applies: an NV or BV is a separate legal entity, which is in principle not liable for the debts of its shareholders. In theory the two most logical exceptions to this rule are: identification (‘vereenzelviging’) and tort (‘onrechtmatige daad’). However, in practice the most important basis for shareholder’s liability is tort. In my view the same applies for the reverse.

To start with identification: this concept is based on legal literature and case law, and applies if two corporations are legally and economically intertwined to such an extent that they must be treated as one legal entity, as a result of which the obligations of one corporation are also considered to be the obligations of the other corporation. Intertwinement may exist where two corporations have the same managing directors, shareholders, assets, personnel and address. There can be intertwinement between a corporation and its shareholders. This would appear to be similar to the concept of an “alter ego type-law”. I shall now briefly discuss four cases, to give an indication of some relevant aspects.

In the Krijger/Citco case (NJ 1996, 213) the Dutch Supreme Court confirmed the Court of Appeal’s judgments (i) that it is possible that the difference of identity between two corporations which are owned by the same person, is abused and (ii) that the purpose of such abuse need not be honored. Citco had a claim against an NV called Lorimar, and made a pre-judgment third party attachment under Krijger, on all claims of Lorimar against Krijger. Krijger had prior thereto entered into a contract with Lorimar, pursuant to which Lorimar would construct a house for Krijger. Following the attachment Krijger terminated the contract with Lorimar, and instructed an NV called Intervorm to finalize the house, thus trying to prevent that future claims of Lorimar would fall under the attachment. Intervorm and Lorimar shared the same shareholder / managing director. Lorimar did not object to the termination of contract. The Court of Appeal held that the termination of the contract with Lorimar was a “fake” transaction, disguising the real relationship, and that Lorimar and Intervorm should be “identified”.

In Bato’s Erf (NJ 1996, 214), a Netherlands case (on the relation between Netherlands and Netherlands Antilles law, please see the next posting), the Supreme Court held that the sole fact that a parent corporation determines the business activities policy of its subsidiary and directs or influences this policy either by having its managing directors act as managing directors of the subsidiary or in its capacity as managing director and/or sole shareholder does not mean that these activities become the activities of the parent corporation, as a result of which the parent corporation would automatically be liable for all of the tortious activities of the subsidiary. The Supreme Court held that no tort of the shareholder itself had been established by the Court of Appeal. The case was then remanded to another Court of Appeal.

In another case the Supreme Court (NJ 1999, 573) rejected that the shareholder in an NV would be liable for the debts of the subsidiary, as the plaintiff did not provide sufficient arguments why the shareholder would be liable. The plaintiff had merely stated that the shareholder owned all the shares in the subsidiary and that as a result, the plaintiff was entitled to take recourse against the immovable property of the shareholder. This was insufficient.

In the case Poot/ABP (NJ 1995/288), also a Netherlands case, the Supreme Court rejected an effort for a reverse pierce of the corporate veil, albeit that the “reverse” aspect was somewhat different than the one envisaged above. In this case the shareholder in a Netherlands company called Poot sued ABP, a counterparty of the company, on the basis that the shares in the company had become worthless as a result of tort or breach of contract of ABP vis-à-vis the company Poot. The Supreme Court held once more that in most cases a company is to be treated as a separate legal entity, and that only in special circumstances an exception may apply. In this case the company Poot should itself have sued ABP. The Supreme Court held that Netherlands company law grants a shareholder ample opportunities to induce his company to perform certain acts. The Supreme Court held that the claim could have been more successful if ABP had committed a tort vis-à-vis the shareholder directly, but this had not been stated by the shareholder; thus no identification in this case. The mere fact that the shares had become worthless was insufficient. The Supreme Court held in this respect that it did not matter that there was only one shareholder who was also the only managing director.

In practice the Supreme Court is very reluctant in imposing liability on a corporation solely on the basis of identification. This was expressly repeated in the Krijger/Citco case. In this respect case law points out that tort is the most important basis for shareholder liability: this would apply if the shareholder had itself committed a tort vis-à-vis a counterparty of the NV, as a result of which the counterparty incurred damages. (To be continued)

Karel Frielink
Attorney (Lawyer) / Partner