Consequences: late filing financial statements in bankruptcy

On 14 November 2023, the Arnhem-Leeuwarden Court of Appeal rendered an interesting judgment on directors’ liability in bankruptcy. The judgment emphasises the importance of filing financial statements on time, but also provides insight into how directors can successfully defend themselves against directors’ liability.

The (indirect) directors of a bankrupt company were held liable by the receiver. This is because, in short, they did not properly perform their duties as directors. The duty to publish had been breached because the annual accounts had not been filed on time in the three years preceding the bankruptcy. As a result, it was established in principle that the board had improperly discharged its duties and was suspected to be a major cause of the bankruptcy. However, as far as one of the financial statements was concerned, there was an insignificant omission because it had been filed only one day late, so this omission was not taken into account. In addition, the directors successfully defended themselves by showing that there were other significant causes of the bankruptcy. As a result, the directors were not liable for the bankruptcy shortfall.

Case study

In 2010, the province of Overijssel (hereinafter “the Province”) provided a grant to the company Kooiker Bedrijfswagenspuiterij en Carrosserie B.V. (hereinafter “Kooiker”). To scale up from manual production to automatic production, a second grant was applied for. As the Province could not provide a second subsidy to Kooiker, it was provided in 2011 to Roelofs Kipper (B.V.) (“Company”), of which Kooijker was a director. At most, the Province was to provide a grant of €1,162,958.00, and pay it as an advance in two instalments. The Province paid the first advance of €581,480 to the Company.

On 20 June 2016, the Province notified the Company of its intention to correct the grant by €880,212.04 excluding VAT following an on-site audit. The Company submitted its views on the audit findings to the Province.

Withdrawal of grant and directors’ liability after bankruptcy

The Province revoked its grant award decision of 2 August 2011 and recovered the advance payment of €581,480. In doing so, the Province argued, inter alia, that the Company had provided inaccurate data, had not kept proper records providing insight into eligible costs, the Province did not have sufficient confidence that the Company would fully carry out the activities for which it received a grant, and the Company had not informed the Province of relevant financial and organisational changes in the Company’s organisation. The Company unsuccessfully filed an appeal with the Province against the revocation decision, and the administrative judge declared the appeal unfounded.

Lack of assets led to the dissolution of the Company through a turboliquidation, but was later declared bankrupt by the court at the request of a creditor. The court-appointed receiver held the (indirect) directors (the “Directors”) jointly and severally liable for the bankruptcy deficit. The court rejected the trustee’s claims, after which the trustee appealed.

Legal framework directors’ liability in bankruptcy

The main rule is that each director is jointly and severally liable towards the estate for the deficit in the estate if the management has performed its duties improperly and it is plausible that this is a major cause of the bankruptcy (Section 2:248(1) of the Civil Code). The circumstances of the case must be taken into account. It must be assessed whether there is a situation in which no reasonably thinking director would have acted under the same circumstances as the director who is accused of improper performance of his duties.
If the management board failed to fulfil its obligations under Article 2:10 of the DCC (accounting duty) or Article 2:394 of the DCC (the duty to disclose annual accounts in a timely manner, the publication duty), it is established that the management board has performed its duties improperly. It follows from Article 2:248(2) of the DCC that there is a legal presumption that the failure to fulfil these obligations is a major cause of the bankruptcy. An insignificant default is not taken into account for this purpose (Section 2:248(2) of the DCC).

Breach of publication obligation

The trustee in bankruptcy invoked the statutory presumption for violation of the accounting obligation and the duty of publication.

The Company’s financial statements were filed as follows:
Financial year: 2015 – Date of filing: 1 February 2017
Financial year: 2016 – Date of filing: 26 January 2018
Financial year: 2017 – Date of filing: 1 February 2019
Regarding the publication requirement, the trustee stated that the 2015, 2016 and 2017 financial statements were published 55, 79 and 85 days late, respectively. The trustee assumed that the deadline for publication ended on 8 December 2016, 8 November 2017 and 8 November 2019. The trustee assumed that the Directors then used the longest possible period for preparing the financial statements pursuant to Article 2:210(1) of the Civil Code, that the signing of the financial statements pursuant to Article 2:210(5) of the Civil Code is also the adoption because the Director is also the sole shareholder of the Company, and that, pursuant to Article 2:394(1) of the Civil Code, filings were then required to be made within 8 days of adoption.

The Directors disputed the trustee’s position. According to them, the delay was 1, 26 and 32 days.

Assessment of exceeding deadlines for publication of annual accounts

The court does not follow the trustee in its position on the number of days by which the deadline for publication of the annual accounts for the years 2015 to 2017 was exceeded. In doing so, the court of appeal put first and foremost that the periods mentioned in Article 2:210(1) of the Dutch Civil Code for preparing the annual accounts are only of importance for the division of tasks within the Company and that, to determine the final deadline for publication within the framework of Article 2:248(2) of the Dutch Civil Code, the maximum possible statutory deadlines must be used as a basis.[1] This also applies in case of simplified adoption.

With regard to the 2015 financial year, the old regime applied where the deadline for filing financial statements was 13 months after the end of the financial year. With effect from 1 January 2016, for the 2016 and 2017 financial years, a deadline of 12 months after the end of the financial year applied under Article 2:394(3) of the Dutch Civil Code. By 31 January 2017, the organisation should have disclosed the financial statements for financial year 2015, the financial statements for financial year 2016 by 31 December 2017 and the financial statements for financial year 2017 by 31 December 2018. The Directors’ contention that the disclosure deadline was missed by 1, 26 and 32 days, respectively, is therefore correct.

Insignificant omission

The Directors argue that for all years, each time there was an insignificant omission, which should not be taken into account when assessing whether the statutory presumption should be adopted. The court follows the Directors’ contention that the one-day delay with regard to the disclosure of the 2015 financial statements is an unimportant omission, so that this delay is not relevant for the adoption of the legal presumption. The situation is different with the delay in disclosing the 2016 and 2017 financial statements. Those missed deadlines, 26 and 32 days respectively, are not so short as to constitute an immaterial default.

The Directors further claimed only that the delay was a result of illness of one of its Directors (2016) and prolonged absence of another Director (2017). Without further substantiation, which is lacking, it is hard to see why this precluded disclosure by another Director.

Rebuttal presumption: other cause of bankruptcy

Now that, moreover, in two consecutive years, the publication obligation has been violated, it is thus irrefutably established that there was improper performance of duties by the Directors as (indirect) directors within the three year period of Article 2:248(6) of the Dutch Civil Code and it is presumed that this was a major cause of the bankruptcy. The failure to comply with the publication requirement indicates that the Board did not otherwise perform its duties properly either. The presumption that improper management is a major cause of the bankruptcy is rebuttable. It is up to the Directors to rebut this presumption. To this end, it is sufficient for them to make it plausible that facts or circumstances other than their improper performance of duties were a major cause of the bankruptcy.

With the court, the court of appeal is of the opinion that the Directors have made a sufficiently plausible case that there was an important cause of the bankruptcy other than improper performance of duties. To this end, the court of appeal enumerated the reasoning facts and circumstances stated by the Directors and insufficiently substantiated by the trustee. According to the court, the Directors disproved the presumption that the bankruptcy was caused by improper administration.

Exoneration from liability for lack of culpability

The court of appeal did not find that the Directors could be blamed for the other facts and circumstances that were a major cause of the bankruptcy because of their failure to prevent, remove or mitigate those circumstances. Indeed, the court sees strong evidence in the attempts to overcome the setbacks that the Directors tried to make the best of it.

Now that the Directors have dispelled the presumption about the cause of the bankruptcy, it is up to the trustee to make that cause plausible as a result of improper management. In this, his contentions fail: he sails entirely on the compass of withdrawing the grant. The trustee saw no reason to conduct any more investigation than what the Province had already done, nor did he further state any facts and circumstances as to what, in his opinion, was the cause of the bankruptcy.

The court concluded that the trustee’s claims were not assignable and upheld the court’s judgment. Thus, the Directors are not liable for the bankruptcy deficit.

Conclusion

The Directors came off well in this case. The question is whether the Directors would have been liable if the trustee had conducted a more extensive investigation. It is therefore important to file the annual accounts on time and to have the administration in good order. This will not give the trustee a presumption of proof.

As a director, have you been held liable by the receiver? Or is bankruptcy possibly imminent and are you worried about the consequences? The lawyers at Fruytier Lawyers in Business have extensive experience in director liability proceedings. Do you have any questions? Then contact one of our lawyers by mail, telephone or fill in the contact form for a free initial consultation. We will be happy to think along with you.you.