On 14 April 2021, the Noord-Holland District Court rendered a judgment related to selective payments. This happens when a director of a legal entity has paid one or more creditors in preference to other creditors who have remained unpaid.
In certain circumstances, in addition to the company, its director may be held personally liable for making selective payments. Procedural law attorney Dirk de Waard explains.
Starting point: payment autonomy
The starting point in Dutch law is payment autonomy. In other words, the board of a company is free to determine which creditors will be paid (in which order).
This basic principle changes if the company runs into liquidity problems. In that instance, directors must be careful. The principle of equality of creditors is a requirement for both bankruptcy and suspension of payments.
The burden of proof of the company’s inability to pay rests on the director
The Van Waning/Van der Vliet judgment is relevant with regard to the burden of proof of the company’s inability to pay. In this judgment, the Supreme Court ruled that if there is a suspicion of unwillingness to pay, the director of a failing company must demonstrate that the company is unable to make payments. The burden of proof is therefore reversed.
Furthermore, the Supreme Court considered that if the director succeeds in demonstrating that there is indeed a case of inability to pay, it has not yet been established that there is also an unwillingness to pay. In order to avoid liability, the director must therefore not only demonstrate the inability to pay, but also disprove the presumption of unwillingness to pay.
Right of action for creditors arises when…
If certain creditors have been selectively paid in the period prior to the bankruptcy, unpaid creditors may have a claim against the director in question.
This requires the director’s actions to have been so negligent that he could personally be seriously blamed for this.
The director concerned acts culpably
A director may personally act culpably if he knew or should have known that the company’s established or permitted course of action – making selective payments – would result in the company no longer being able to fulfil its obligations towards other creditors and provide redress for the damage that these creditors would suffer as a result.
If a company has already filed for bankruptcy and has insufficient financial resources to pay all its creditors, the company is not free to pay its affiliated companies with priority.
In other words, this company may not simply favour other companies. If the company nevertheless proceeds to do so, it will in principle be acting unlawfully towards these creditors.
A serious personal accusation against the director in question can be made for this, unless the director demonstrates that there are special circumstances to justify the preferential treatment.
If the director of a company had a personal interest in making a payment (in the face of bankruptcy), it is in principle assumed that the selective payment is unlawful.
There is, for example, a personal interest if the director has issued a personal guarantee for a debt of the company.
High threshold for directors’ liability
In the case before the District Court of Noord-Holland, the bankruptcy trustee demanded that the director of the bankrupt company should be ordered to pay EUR 402,153.65.
According to the trustee, the basis for liability of the director was twofold:
on the one hand, the liability arose from the fact that the director – after the bankruptcy of the company had been applied for – had made several payments to one supplier;
on the other hand, the director had a personal interest in these payments, according to the trustee.
The District Court of Noord-Holland was of the opinion that the director could not be seriously accused of any personal responsibility. It reached this conclusion because the supplier’s claims were due, and the supplier was not the only creditor paid by the company during that period.
The bankruptcy trustee was therefore not followed in his assertion that the director had deliberately set up a death house structure. Moreover, the bankruptcy trustee had not provided sufficient substantiation that the payments to the supplier were motivated by a personal interest of the director.