Good governance: Make sure agreements with the sole shareholder are laid down in writing!

Publication date: 23 November 2016
Oral agreements with the sole shareholder of a company can easily be annulled. For instance, already provided management reimbursement can be reclaimed. How can you prevent this from happening?

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Companies are required to lay down activities with their sole shareholder in writing. Otherwise the sole shareholder risks that agreements concluded with the company can later be successfully annulled (mostly by the trustee in a bankruptcy). As a consequence, an already provided management reimbursement might have to be paid back.

Single-member company

A single-member company is a private limited company (BV) or public limited company (NV) with one shareholder. In actual practice, this shareholder is often a director. Then, the shareholder will be authorized to represent the company. In this case, it is tempting not to lay down in writing agreements made between the shareholder and the company as both parties are the same.

Written record

The legislator wants to prevent a sole shareholder from performing legal acts for his or her own benefit which are at the expense of the positon of creditors of the single-member company. Such as, for instance, debts of the sole shareholder remitted by the single-member company. To protect creditors, the law therefore prescribes that legal acts (mostly agreements) between the sole shareholder and the single-member company must be laid down in writing.

Exception

The main rule of written record does not apply to legal acts falling under “common professional practice”. To determine which legal acts do fall under this vague definition, it is not sufficient to take a look at the aim of the single-member company in the articles of association. Pursuant to the legislator this must relate to legal acts which were agreed upon on the “usual conditions”.

Annulment

If there is no written record of the legal act, this act can be annulled for the benefit of the company. There are two possibilities, namely:

  • The company can annul the legal act extrajudicially (without court interference) by a statement to the sole shareholder
  • The company can request the court to annul the legal act by a judicial decision.

In practice, annulment is applied regularly by trustees of bankrupt single-member companies. For instance, The Hague District Court has decided recently, that an management agreement concluded verbally with the single shareholder was to be annulled.

Consequences

An annulment has retroactive effect. This means – once a legal act has been annulled – this act is considered never to have existed.  As a consequence, for instance, paid management remuneration(s), a remitted debt or a loan could (still) be reclaimed by the trustee from the single shareholder. If the agreement has been made in writing, the trustee can only reclaim the money if he or she can prove that the creditors were disadvantaged on purpose.

Action

  • Are you the sole shareholder and authorized to represent the company? Lay down in writing each legal act between the single-member company and the shareholder.
  • Do not trust in the vague exception of activities belonging to “common professional practice” provided for by law.

More information

Would you like to know which legal acts should lay down in writing? Or do you have any other questions regarding corporate law and agreements? Please contact Russell Advocaten:

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