Liability of a Trust Director
Common Court of Justice: No lighter liability system for Trust Directors.
The National Ordinance on the supervision of Trust Service Providers (Landsverordening toezicht trustwezen) does not provide anything with regard to the liability of trust offices (a.k.a. management services companies) or their representatives acting as a director under the Articles (of Association) of a legal entity (for instance a company limited by shares ('NV'), private company with limited liability ('BV') or foundation). The question is whether this liability is governed by the usual rules in this area. Because the trust office as a director of a legal entity usually fulfills a different role from a director - independently - taking strategic decisions, the question arises whether a lighter liability system could apply to a trust office.
Recently the Common Court of Justice rendered a judgment according to the law of St. Maarten with regard to the liability of a trust director. The judgment dates from 13 March 2015 and followed on from an appeal lodged against a judgment by the Court of First Instance in St. Maarten of 29 October 2013. For that matter, the result would not have been different in Curaçao and the BES Islands.
The case related to a private fund foundation (stichting particulier fonds: 'SPF') which owned a parcel of land and on which the SPF had an apartment complex constructed. This complex was then split up into apartment rights which were subsequently sold on to third parties. A trust office was the director of the SPF and it resigned about one and a half years before the bankruptcy of the SPF. The trust director was held liable by the bankruptcy trustee on the basis of improper management. For instance, there were no proper accounts and various things were not in order.
If a legal entity becomes bankrupt, any managing director (appointed as such in accordance with its Articles) becomes jointly and severally liable for the deficit of the bankrupt's estate if it is apparent that improper management was involved and it is plausible that this was a major cause of the bankruptcy. This main rule applies to a foundation if it is linked to an enterprise within the sense of the Trade Register Ordinance (for a period of three years prior to the bankruptcy), whereby only improper management during that period is taken into account.
According to the trust office no enterprise was associated with the SPF and therefore the trust office could not be sued on account of the director's liability doctrine. The Appeal Court held that, considering the activities of the SPF, the SPF was in actual fact operating an enterprise. The main rule, namely that in connection with a bankruptcy directors are liable in the event of improper management, is therefore applicable.
The trust office also argued that a third party actually conducted the management of the SPF and should therefore be held liable as the co-policymaker. The Appeal Court held that if there is such a quasi director, this does not discharge the formal director from its own responsibility and liability. In other words: the formal director cannot exculpate itself with the argument that actually (materially) someone else conducted the management. The Appeal Court added to this that it had not become manifest either that the trust office had taken measures to avert the consequences of the acts of that quasi director.
The trust office also argued that different liability standards apply to trust directors. However, the Appeal Court held that Section 2:16 of the Civil Code is aimed at the managing director's liability of directors of a legal entity in the event of a bankruptcy. According to the Appeal Court the section of the Code referred to has no separate assessment standard for the assessment of the managing director's liability of the directors of an SPF, being a legal entity. Therefore, according to the Appeal Court the starting point is that the trust office is considered as a director of an SPF which has been active in operating an enterprise.
The Appeal Court held, following the Court in First Instance, that the trust office is a fully fledged director with all the associated duties and responsibilities. Therefore the same requirements are imposed on a trust director as those imposed on an 'ordinary' director. The argument of the trust office that it acts according to the instructions of the client / principal (the ultimate beneficial owner) does not affect this according to the Appeal Court.
In the end, it was held that in this case improper management was involved and that the improper management was a major cause of the bankruptcy.
Already previously, the Supreme Court held in its ruling of 8 July 2011 (ECLI:NL:HR:2011:BP8686; JOR 2011/285) that according to Dutch law the criterion of a serious reproach should apply to answering the question of whether a trust office as a director of a legal entity has fulfilled its duties improperly. In this connection, no significance is attached to the fact that the trust office acted as a trust director. In other words: with regard to responsibilities and liability a trust office as a director is assessed the same as any other director under the Articles of Association.
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Recently the Common Court of Justice rendered a judgment according to the law of St. Maarten with regard to the liability of a trust director. The judgment dates from 13 March 2015 and followed on from an appeal lodged against a judgment by the Court of First Instance in St. Maarten of 29 October 2013. For that matter, the result would not have been different in Curaçao and the BES Islands.
The case related to a private fund foundation (stichting particulier fonds: 'SPF') which owned a parcel of land and on which the SPF had an apartment complex constructed. This complex was then split up into apartment rights which were subsequently sold on to third parties. A trust office was the director of the SPF and it resigned about one and a half years before the bankruptcy of the SPF. The trust director was held liable by the bankruptcy trustee on the basis of improper management. For instance, there were no proper accounts and various things were not in order.
If a legal entity becomes bankrupt, any managing director (appointed as such in accordance with its Articles) becomes jointly and severally liable for the deficit of the bankrupt's estate if it is apparent that improper management was involved and it is plausible that this was a major cause of the bankruptcy. This main rule applies to a foundation if it is linked to an enterprise within the sense of the Trade Register Ordinance (for a period of three years prior to the bankruptcy), whereby only improper management during that period is taken into account.
According to the trust office no enterprise was associated with the SPF and therefore the trust office could not be sued on account of the director's liability doctrine. The Appeal Court held that, considering the activities of the SPF, the SPF was in actual fact operating an enterprise. The main rule, namely that in connection with a bankruptcy directors are liable in the event of improper management, is therefore applicable.
The trust office also argued that a third party actually conducted the management of the SPF and should therefore be held liable as the co-policymaker. The Appeal Court held that if there is such a quasi director, this does not discharge the formal director from its own responsibility and liability. In other words: the formal director cannot exculpate itself with the argument that actually (materially) someone else conducted the management. The Appeal Court added to this that it had not become manifest either that the trust office had taken measures to avert the consequences of the acts of that quasi director.
The trust office also argued that different liability standards apply to trust directors. However, the Appeal Court held that Section 2:16 of the Civil Code is aimed at the managing director's liability of directors of a legal entity in the event of a bankruptcy. According to the Appeal Court the section of the Code referred to has no separate assessment standard for the assessment of the managing director's liability of the directors of an SPF, being a legal entity. Therefore, according to the Appeal Court the starting point is that the trust office is considered as a director of an SPF which has been active in operating an enterprise.
The Appeal Court held, following the Court in First Instance, that the trust office is a fully fledged director with all the associated duties and responsibilities. Therefore the same requirements are imposed on a trust director as those imposed on an 'ordinary' director. The argument of the trust office that it acts according to the instructions of the client / principal (the ultimate beneficial owner) does not affect this according to the Appeal Court.
In the end, it was held that in this case improper management was involved and that the improper management was a major cause of the bankruptcy.
Already previously, the Supreme Court held in its ruling of 8 July 2011 (ECLI:NL:HR:2011:BP8686; JOR 2011/285) that according to Dutch law the criterion of a serious reproach should apply to answering the question of whether a trust office as a director of a legal entity has fulfilled its duties improperly. In this connection, no significance is attached to the fact that the trust office acted as a trust director. In other words: with regard to responsibilities and liability a trust office as a director is assessed the same as any other director under the Articles of Association.
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