4.3.2.3 Were the litigious actions qualified as ‘subjective bad faith’ actions?

It is first important to emphasise that the studied cases in which the litigious actions were covered by the protection of the discharge clause did not involve ‘subjective bad faith’ actions.

Of the 11 cases that have been coded, 5 cases did involve ‘subjective bad faith’ actions on the part of the defendant director. In all of the 5 cases, the director was found to be personally liable to the company; discharge could not absolve the defendant director of liability for ‘subjective bad faith’ actions. In 2 of these ‘subjective bad faith’ cases, the director committed a criminal offense. These involved De Rouw v. Dingemans1 which I will discuss in more detail below and Berghuizer Papierfabriek.2 I will first start with discussing the role played by the discharge provision in one exemplary case involving actions in ‘subjective bad faith’ but not a criminal offence, before moving to De Rouw v. Dingemans.

In Traffic Service Nederland B.V., the director was judged personally liable for excessive, unauthorised, expense claims for the account of the company. The discharge could not be used as protection for the litigious actions. The District Court reasoned that information about the expense claims could not be derived from the financial statements. The fact that the external accountant had commented on the expenses incurred by management and a lack of any monitoring of them in the financial reports could not lead to the conclusion that the general shareholders’ meeting was knowledgeable of these impermissible expenses.3 Moreover, it was emphasised in this case that the director was held liable for serious reproachable, ‘deliberate harmful acts.’4

In De Rouw v. Dingemans,5 the director committed fraudulent acts and manipulated the company’s books and records to conceal the illegal acts. The director was convicted for the criminal offences. In the civil procedure, by analogy with Staleman v. Van de Ven,6 the Supreme Court reasoned that knowledge of the fraudulent actions could not be derived from the financial statements.7 Hence, De Rouw’s general shareholders’ meeting was not fully knowledgeable of the litigious actions for which they granted the discharge. There is something peculiar about this case however: de Rouw sr., the company’s sole (indirect) director and shareholder committed the illegal acts and discharged himself of them. He was consequently fully knowledgeable of the fraudulent acts at all times. Evidently, the full knowledge of the litigious actions of de Rouw sr. was not considered decisive. In its decision, the Supreme Court found that a discharge may not extend to fraudulent acts which, due to manipulation of the books, were not discernible in the financial statements. Commentators have expressed their criticism and argued that mala fide directors still could get around the court ruling as long as they ensure that the bad faith actions are mentioned in the financial statements or other documents for the purposes of informing the shareholders’ general meeting. When the shareholders’ general meeting subsequently resolves to grant a director discharge, the bad faith actions are ostensibly known to them and mala fide directors could still rely on a validly provided discharge.8

As I will demonstrate in paragraph 4.4.3, there is an alternative way to understand the judgment in De Rouw as not predominantly based on the logic of ‘known’ action but based on the voidness of the discharge by reason of immoral purpose (art. 3:40[1] DCC). Such discharge would not serve any reasonable company interest and should remain invalid.