Consequences of a “403 statement”

Publication date: 10 December 2020
Exemption from publication of annual financial statements of part of a group is possible by making use of a “403 statement”, in which the mother company accepts liability for the subsidiary. Dutch subsidiaries with a mother company from the United Kingdom have to be attentive regarding Brexit.

Concern

If legal bodies are part of a group they can be exempted from the requirement to file their annual financial statements with the trade register. It is thus possible that the consolidated financial statements for the group will suffice. The advantage of a group exemption is that competitors do not gain insight in the financial data of the separate companies within a group. In addition, it will make a substantial difference to the costs not to have all legal bodies within a group publish separate financial statements.

To be able to make use of the exemption scheme, a superior group company – often the mother company – by means of the so-called 403 statement has to accept liability for the debts the subsidiary incurs. This scheme owes its name to Section 403 of Book 2 of the Dutch Civil Code, where it is established.

Group exemption

A group is required to prepare consolidated financial statements; however, this does not mean that legal entities within the group are exempt from their requirement of publication of their own financial statements. The different legal entities may be exempt from this requirement by a so-called 403 statement. The conditions for such a group exemption are:

  • The financial data of the exempt legal body have to be included in the consolidated financial statement of the mother company.
  • The mother company declares in writing that it is liable for debts arising from legal acts of the exempt legal entity, this is the 403 statement;
  • Both the consolidated financial statements and the 403 statement have to be filed with the trade register.

Liability of mother companies

If the exempted legal body finds itself in financial difficulties and cannot fulfil its obligations, the risks of such an exemption will become apparent. The mother company will be addressed under the 403 statement and will be stuck with the debts of the subsidiary. The liability of the mother company concerns debts arising from legal acts performed by the subsidiary, such as employment contracts and lease contracts. Debts arising thereof, including salary, severance pay and damages due to non-performance, come under the effect of the 403 statement.

This risk for the mother company is a reason why banks often require a 403 statement for loans to a subsidiary. This way they have another means of recovery in case the loan will not be paid off.

Personal liability

If the conditions for group exemption are not met, the subsidiary does not comply with its statutory requirement regarding publication of the annual financial statements. Should the subsidiary go bankrupt, it is clear that the board has acted improperly. As a consequence, the management could be held personally liable for the estate debts.

Termination of the 403 statement

The written 403 statement can be revoked by filing a withdrawal statement with the trade register, but this doesn’t mean the mother company is rid of its responsibilities. The withdrawal only concerns the liability for debts and legal acts the subsidiary has performed after the withdrawal. The mother company will remain liable for debts arising from legal acts that were performed before the withdrawal, which is the “remaining liability”. Hence, the mother company will remain liable for debts arising from employment contracts that were concluded before the withdrawal, even if the debts were incurred after the withdrawal of the statement. Under certain conditions, the remaining liability can be terminated but is not settled just like that.

The consequences of Brexit for the annual financial statement exemption

From 1 January 2021 onward, the United Kingdom will no longer be bound by EU law. As a result, in most cases, Dutch subsidiaries will no longer be able to make use of the  annual financial statement exemption based on the 403 statement through the consolidated financial statements of a legal entity under UK law. If the Dutch subsidiary still wishes to make use of the annual financial statement exemption, another solution will have to be looked for. We will gladly advise you on the possibilities regarding your specific situation.

More information

Our corporate law specialists will gladly help you to fulfil the conditions for exemption and to limit the consequences of liability. Do you have any questions regarding the preparation of a 403 statement or are you interested in the possibilities for your company? Please contact us:

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