Good governance: Who’s liable - the legal entity or the directors?

A legal entity may only participate in economic or social life if represented by natural persons. Generally, these are the board or director(s). How do you know who’s authorised to represent a legal entity and what can you do if directors representing a legal entity are not authorised to do so?

Representation means that legal acts, which have consequences with regard to external legal relationships, are attributed to the legal entity (such as NV, BV, Vereniging (association), Stichting (foundation)). These legal acts include concluding contracts, placing orders, and banking. The rule of law is that the legal entity shall be represented by the board.

Representative authority can also be vested in persons other than directors. This subject will be dealt with in another newsletter.

Who has authority – the board or the director(s)?

The articles of the NV, BV, Vereniging (association) or Stichting (foundation) cannot eliminate the representative authority of the board. However, the articles can attribute representative authority to one or more director(s) in particular. In addition, it is possible that the directors only hold representative powers jointly with one or more non-directors. In practice, the following arrangements (for instance, a clause requiring one or more signatures) are possible:

• Director A holds representative authority
• Director A and director B hold representative authority separately
• Director A holds representative authority jointly with director B
• Director A holds representative authority jointly with director B and director C
• Director A holds representative authority jointly with director B and/or director C.

Unrestricted and unconditional

The representative authority of the board or director(s) is unrestricted and unconditional, unless otherwise provided by law. Unrestricted means the representative powers cannot be restricted to performing certain legal acts or legal acts that do not exceed a certain amount. Unconditional means that the representative authority may not be subject to a valid resolution preceding it.

Internal regulations and instructions

Despite the representative authority being unrestricted and unconditional, the articles of association of the legal entity may well contain restrictions and conditions with respect to the representation (referred to as internal regulations). One example for a restriction is a transaction limit of EUR 50,000, or the condition that the consent of the shareholders meeting is required for certain actions.

These restrictions and conditions only serve as internal instructions for the board. If a director holding representative authority acts in breach with an internal statutory restriction or condition, the legal entity will, in principle, be bound to the action but the director may be held liable (internally) for the damage suffered by the legal entity.

Legal restrictions

Exceptions to the unrestricted and unconditional representative authority are possible only to the extent that they result from the law. The most important exceptions include:

• The aforementioned restrictions (clause requiring one or more signatures).
• The board of the NV is not allowed to withdraw the required securities for the capital contributed for the incorporation (EUR 45,000) without consent of the shareholders meeting (Art. 2:94c Dutch Civil Code).
• An NV can only acquire its own shares (buying), if the board is authorised thereto by the shareholders meeting (Art. 2:98 Dutch Civil Code).

Listing with the commercial register

Only the legal entity is allowed to invoke a legal restriction. This requires the restriction’s registration in the business register of the Chamber of Commerce. In this event, the other party can claim an extract from which can be concluded that the person it intends to do business holds representative authority.

Action

• Are you a director of a legal entity? Confirm whether you hold representative authority and whether any internal articles of association are applicable.
• Do you intend to conclude contracts with a legal entity? Check in the business register, before entering into business, which persons hold authority and for what actions.
• Does a director holding representative authority buy goods? Get advice on whether the legal entity will be bound by this transaction.

More information

Russell Advocaten will gladly advise you on establishing a legal entity, drafting articles of association, registration with the Chamber of Commerce, the assessment of whether you are bound by an agreement, and the liability of a director whose conduct is in breach with an internal instruction. Please contact: