22.6.2.2 Limits on ‘de facto’ distributions and reducing exposure

In addition to distributions, other types of transactions between a company and its shareholders frequently occur. Section 2:216 DCC does not directly apply to such transactions, but these transactions can nevertheless also be prejudicial to creditors and thus give rise to shareholder liability. In this context, I feel that it is useful to distinguish between ‘de facto’ distributions and payments that only reduce the exposure of the shareholder. In my definition, a ‘de facto’ distribution is involved if a transaction between the company and a shareholder or a third party, in fact, results in a decrease of the risk-bearing capital of the company in favour of a shareholder. I believe that the same standard applying to formal distributions applies to these transactions, as well: if at the time of the ‘de facto’ distribution, the shareholder seriously had to allow for a deficit, he acts wrongfully vis-à-vis the collective creditors by accepting the distribution. As a result, from the time when the shareholder must seriously allow for a deficit, intragroup transactions must be conducted at an arm’s length basis. If the company makes interest payments on a shareholder loan during this period that do not conform to market terms, the amount paid in excess can be reclaimed from the shareholder in the event of bankruptcy by virtue of Section 6:162 DCC. If in this period, the company repays a shareholder loan that should be deemed to be part of the company’s risk-bearing capital due to the imbalance between equity and loan capital, the shareholder can be required to repay the means received. Finally, the shareholder also acts wrongfully if at the time when he must seriously allow for a deficit, he receives security for a loan that he previously furnished to the company.

In my opinion, a payment reducing the shareholder’s exposure is involved if a payment by the company to (or in favour of) a shareholder does not lead to a reduction of the risk-bearing capital, but results in the shareholder’s exposure in bankruptcy being reduced. This can occur, for example, in the repayment of a regular credit furnished by a shareholder, or in the payment of regular debts to third parties that the shareholder or other group companies have warranted. In my view, restraint should be exercised in assessing these payments. If these payments are made voluntarily at a time when it was foreseeable that the payments would be prejudicial to the creditors, they are subject to nullification based on Section 42 Fw, in which the trustee is considerably assisted by the probable evidence of Section 43 Fw. If the company was required to make the payments, the fraudulent transfer in bankruptcy law generally cannot be invoked; in principle, the payments are not wrongful, either. If the company has run into difficulties and its shareholders must seriously allow for insolvency, they should refrain from making any formal or ‘de facto’ distributions, but compulsory payments to shareholders that are made in the ordinary course of business are permitted. Wrongful conduct by the shareholder can only be involved if the payments obviously serve to reduce the shareholder’s exposure, do not serve any reasonable objective of the company or if the company’s bankruptcy is inevitable.