22.6.2.1 Limits on formal distributions

All doctrines discussed above maintain the standard that the shareholder’s discretion to withdraw capital from the company ends if the shareholder knows or reasonably should realize that after the distribution, the company will encounter continuity problems. For example, by virtue of Section 2:216 (3) DCC, the shareholder must refrain from making any distribution if he knows or should foresee that as a result, the company will encounter payment problems. The shareholder who does not receive a distribution in good faith can be sued by the company for the deficit caused by the distribution. In this context, it is irrelevant whether the shareholder contributed to the establishment of the distribution by exercising his voting right. The assessment is made at the time at which the shareholder receives the dividend rather than the time of the decision-making process. In the event that continuity problems are not foreseeable at the time the GM adopts the distribution resolution, but can be (and should be) foreseen at the envisaged time of making the dividend payable, the shareholder should thus refrain from the (actual) withdrawal. In that case, the interests of the company’s creditors in maintaining the company’s capital prevail over the interests of the shareholders in the anticipated distribution.

Established case law demonstrates that under certain circumstances, by virtue of Section 6:162 DCC, shareholders can also be required to repay any unauthorized distribution. For this to apply, the shareholder must have exercised his voting rights and thus contributed to the establishment of the distribution resolution, even though at that time, he seriously should have allowed for a deficit. In the event of liability due to withdrawals, the Supreme Court uses a less stringent requirement of knowledge – which will thus be satisfied more readily – than in the event of liability based on a wrongful continuation of loss-making activities. For that reason, it may be possible for the company to be undercapitalized to such an extent that the shareholders are not (yet) acting wrongfully by having the company continue its activities, but are acting wrongfully if they withdraw capital from the company at that time. I believe that this distinction is correct, given that continuation of the business will usually also be in the interest of creditors and other stakeholders, as long as there is a reasonable chance of survival. On the other hand, capital withdrawals by shareholders result in prejudice to creditors without reservation if bankruptcy follows. Moreover, capital withdrawals do not serve any of the company’s short-term economic or strategic objectives, and they adversely affect the company’s financial resilience. Thus, in difficult financial times, withdrawals from the company’s capital should not be made. In addition, in principle a wrongful capital withdrawal does not lead to an actual piercing of the corporate veil in the sense that the shareholder can be required to pay creditors’ claims against the company, but only a repayment obligation: the shareholder must repay the company the amount withdrawn – by way of compensation – and as a result, is placed in the same position he was in before the unauthorized withdrawal. In American and German case law, capital withdrawals more frequently and more quickly lead to the liability of shareholders than the continuation of a loss-making business.

To assume liability based on an unauthorized capital withdrawal, the shareholder is not required to have extensively interfered in the company’s policy; the withdrawal in combination with the knowledge mentioned above is sufficient for this purpose. In the event that there is a causal link between the distribution and the company’s bankruptcy, by virtue of Section 6:162 DCC the shareholder can also be sued for any damages in excess of the amount of the distribution. In that case, the shareholder is not blamed for withdrawing capital at a time when the company was already undercapitalized, but for causing the undercapitalization. In that case, a repayment obligation is no longer involved, but rather liability for the damages that the creditors suffered as a result of the undercapitalization.

Sections 2:216 (3) and 6:162 DCC only point to liability if the shareholder was aware or should have been aware of the unauthorized nature of the distribution. In addition, under certain circumstances, the application to set aside a fraudulent transfer offers the trustee the possibility of reclaiming a distribution that the shareholder received in good faith. In my opinion, the GM’s distribution resolution and the approval resolution of the board qualify as voluntary legal transactions for no consideration, so that they qualify for nullification in the event that the company had knowledge of prejudice in the sense of Section 42 Fw (Dutch Bankruptcy Act) at the time of the decision-making process. If the trustee targets the approval resolution of the board, he will have to contend and prove that at the time of (approval for) the distribution, the board knew or should have realized that this would prejudice the creditors. If the bankruptcy trustee succeeds, the nullification of the resolution eliminates the legal basis for the dividend distribution, so that the distributed capital can be reclaimed from the shareholder as unduly paid. If the company is declared bankrupt within one year after the distribution, by virtue of Section 45 Fw, the company is presumed to have had the previously mentioned knowledge of prejudice.

The trustee who observes directors and shareholders who knew or should have realized at the time of the distribution that the company would result in continuity problems can choose which party to sue by virtue of Section 2:216 (3) DCC. If the trustee elects to initiate legal action against the directors, they can add the shareholders as third parties to the proceedings or they can seek recourse from the shareholders. After all, the ultimate obligation to contribute is borne by the shareholders, because they were enriched by the distribution. Even if only the board was aware of the continuity problems and the shareholders thus received the distribution in good faith, the trustee has two options. Based on Section 2:216 (3) DCC, he can initiate legal action against the members of the board, or he can nullify the approval resolution by invoking fraudulent transfer and subsequently reclaim the distribution from the shareholders. If the trustee manages to reclaim the dividend from the shareholders, initially the directors are in the clear: after all, the repayment has eliminated the deficit that was caused by the distribution. I believe that it is reasonable that in this situation, the adverse consequences of a distribution are placed more with the beneficiaries of the transaction, and the board’s obligation to contribute is in fact reduced to the part of the distribution that the company cannot reclaim from its shareholders. In America, as well, the shareholder who receives the distribution in good faith can be required to repay the capital withdrawal which left the company with an unreasonably small capital. In Germany, shareholders receiving a distribution which results in an Unterbilanz in good faith are also required to repay the dividend.

Finally, it is possible that due to his role in a capital withdrawal, the shareholder qualifies as a factual policymaker. In that case, based on Section 2:216 (4) in conjunction with (3) DCC, the shareholder can be sued for the full amount of the distribution, including the part that was distributed to his fellow shareholders. If a causal link between the distribution and the bankruptcy can be demonstrated, by virtue of Section 2:248 (7) DCC, the shareholder can be sued for the entire deficit in bankruptcy. The shareholder qualifies as a factual policymaker if he directly interfered in the management of the company, coupled with brushing aside the formal board. This brushing aside can be found, for example, in the actual influence that the shareholder exercises on the board. The shareholder who extensively interferes in a refinancing of the company and in so doing, in fact, imposes his will on the formal board, qualifies as a factual policymaker under certain circumstances. The fact that interference with the company board occurred only once is no limitation.