When proposing the granting of a dividend or bonus, as a director you must consider the big picture for the company. Indeed, the Court of Cassation confirmed in its judgement of 23 May 2024 c.23.0088.N/1) that a broader perspective is required than just the quantitative restrictions imposed by law.
The judgement dealt with a decision holding the director liable for his proposal to the general meeting to pay a dividend that would ultimately contribute to the subsequent bankruptcy of the company. This dividend passed the net asset test of former Article 320, § 1 Companies Code (“WVenn”), which, by the way, was not even under discussion in this case. Today, this article is still applicable under the Companies and Associations Code (“WVV”) in Articles 5:142 for the BV (limited liability company), 6:115 for the CV (limited partnership) and 7:211 for the NV (public limited company). Also keep in mind the liquidity tests for the BV and CV (5:143 and 6:116 WVV respectively).
In this particular case, the company’s activity had already been loss-making for a number of years. However, due to the sale of a property and revaluations, the equity increased in that financial year and an extraordinary profit could be recorded. However, due to the sale of the property, the company had to rent this property again, which of course entailed a monthly cost. Moreover, the activity continued to operate in a highly competitive international market and there was a decline in sales. It was therefore not improbable that the results would continue to disappoint in subsequent years.
Nevertheless, the board decided to propose the payment of a dividend and a bonus at the general meeting. Another part of the extraordinary profit was used to cover losses carried forward. Thus, almost the entire profit was used up. The dividend was used to (indirectly) repay the company’s current account debt to the director. Already in the next financial year, the company incurred another loss. A year after the payment of the dividend, it was no longer possible to pay the lease and a few months later the company was declared bankrupt and receivers were appointed.
The Court of Appeal ruled that the general meeting formally approved the dividend and discharged the director, but that the majority shareholder was also the director and that the director therefore knew in advance that the general meeting would approve this decision. The Court stated that in doing so “it [allowed] its interests to prevail over those of the creditors” and that the company was thus “deprived of a necessary buffer to ensure its chances of survival”. The Court ruled that “a reasonably far-sighted director [would] not have made a proposal to distribute the profits in full”.
The Court of Appeal decided that the conditions were met for the director to be held personally and jointly and severally liable or not for all or part of the company’s debts to the extent of the deficit in accordance with former Article 61, §2 WVenn (equivalent Article 2:54 WVV).
The Court of Cassation upheld the judgement of the Court of Appeal and more specifically that there was a manifest gross error on the part of the director, even though the dividend withstood the quantitative restrictions in Article 320, § 1 WVenn (Article 5:142 WVV) and was approved by the general meeting. Therefore, before proposing a dividend to the general meeting, it is therefore best as a director to consult with your advisor as to whether this is the best decision for your company.
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This article was written by Irene Tromp, she specialises in company law, mergers & acquisitions and corporate law.