4.4.2 Ellem Beheer v. De Bruin 2.0

Ellem involved a one-man private company (B.V.). All except one of its shares were held by Mr de Bruin, who was the company’s sole director. The remaining share was held by Mrs de Bruin. The couple decided to sell their shares in the company. After the sale but before the transfer of the shares, Mr. de Bruin, on behalf of the company, provided a loan in the amount of 1.9 M guilders to Bungalet, a Swiss AG, without investigating the solvability of the AG or requiring security or any other conditions for repayment. In Ellem’s financial statements of June 1983, the transfer order was specified as a loan to Bungalet AG. On 25 May 1983, the entire share capital was sold and transferred by deed in exchange for an amount of 2 M guilders to H. Ritter-Wagner who was represented by Hazewinkel. Moreover, parties to the sale have declared to be ‘knowledgeable of the transactions in the company’s equity from 1 January 1983 to date and require no further particulars.’1 On the same date, at the occasion of the general meeting of shareholders, De Bruin was granted final discharge as part of his resignation procedure. After 25 May 1983, Ellem’s shares were sold and transferred several times and changes took place in the company’s board. In August 1985, on Ellem’s inspection, it appeared that Bungalet AG was not registered in the Swiss commercial registers and that any recovery was likely illusory. Ellem instigated a claim for damages. De Bruin stated in his defence that Ellem’s general shareholders’ meeting had provided him final discharge.

The Supreme Court first judged that the discharge decision was legally valid and had passed the test of good morals and public order (art. 3:40 DCC). Two circumstances may or could have been important: i) the full knowledge that Ellem’s shareholders possessed with regard to the litigious transaction when granting De Bruin discharge, and ii) the interests of Ellem’s company and the disadvantage that the discharge could bring to the company.

In the specific case, Ellem’s shareholders were fully knowledgeable of the litigious transaction; the transaction was specified in Ellem’s financial statements. Finally, parties to the sale declared themselves to be fully knowledgeable of all changes in Ellem’s equity in the deed of sale, including the litigious transaction. The Supreme Court originally held that De Bruin’s intent was an irrelevant factor.2 Accordingly, the Supreme Court did, on no account, infer or deem that De Bruin had defrauded the company or acted intentionally harmful to the prejudice of the company.3 Neither did the Supreme Court adopt factual assumptions indicating De Bruin’s conduct in ‘subjective bad faith’.4 The Supreme Court held the discharge to be legally valid and effectively covering the litigious action, ‘even if De Bruin would have acted intentionally or negligently to the detriment of the company.’5 Here is why. In the particular case, the discharge was not in conflict with the company’s interest. Ellem was a oneman B.V. that was directed and controlled by De Bruin, whose personal interest was identified with the company’s interest, or at least, was inseparable.6 Other than De Bruin, Ellem had no employees and did not conduct any business. Under these conditions, the company’s interest was not violated. Indeed, Ellem suffered no effective harm.

Once the discharge was judged legally valid, the next legal question involved the applicability of the discharge resolution. Under art. 2:8(2) DCC, a valid discharge decision may only be set aside in exceptional circumstances in which the applicability of the discharge would lead to ‘unacceptable’ results under the standards of reasonableness and fairness.7 Article 2:8(2) DCC thus imposes a restrictive judicial review in service of legal certainty. In this specific case, there were no such exceptional circumstances. Since Ellem’s shareholders were all knowledgeable of the litigious action and since the discharge, intended to protect against the litigious action, could not be deemed void, De Bruin could effectively rely on the discharge that was granted to him in his defence.

Accordingly, Ellem Beheer 2.0 demonstrates that a company may, represented by its general shareholders’ meeting, freely and legally waive the right to seek legal redress from its director even to its own disadvantage. In the case in question, De Bruin was not accused of defrauding the company or acting with the intent to harm the company; the general shareholders’ meeting was fully knowledgeable of the litigious action, and the litigious action did not cause any effective harm to the company. Under the given circumstances, the discharge resolution did not therefore run contrary to the company’s interest. Hence, the Supreme Court indeed did not impose legal constraints on the ‘freedom of contract’. This will, however, appear otherwise when I reinterpret De Rouw v. Dingemans8 in the next paragraph. The discharge will then not serve any reasonable company interest and be deemed null and void.