Distributions, in particular of dividends, by Dutch limited liability companies (BV’s)
Distributions, in particular dividends, by Dutch limited liability companies (BVs)
As of October 2012, new legislation applies to Dutch limited liability companies, BVs. With the introduction of the Flex-BV, the minimum capital requirement for BVs has been scrapped. In the interest of debtor protection, the legislator has imposed a new obligation on directors. They will need to check whether any distribution by the BV to its shareholder(s) is accountable in view of the interests of all parties involved (article 2:216 (2) of the Dutch Civil Code).
Distribution is not a defined term. However, in general, it is assumed that a range of distributions are covered by this provision. These include:
- Different forms of dividends: the distribution of profits on the basis of financial accounts; distribution from the other reserves; interim dividends;
- Repayment of the share premium (otherwise known as agio);
- Repayment of capital contributions, whether for capital reduction or otherwise;
A distribution in connection with the purchase of a BV’s own shares.
In practice, the distribution of dividends is the distribution that occurs most. The remainder of this blog therefore largely focuses on dividend payments, but not to the exclusion of other distributions.
Two tests need to be applied to distributions: the balance sheet test and the distribution test. In addition, a BV’s articles of association or contracts with third parties may attach conditions to dividends or other distributions. These should therefore be checked as well.
Balance sheet test before dividend payment
The balance sheet test (balanstest) is to be performed by the general meeting of shareholders and is related to the determination of the amount to be distributed. The general meeting of shareholders is empowered with the allocation (in other words, the appropriation) of the profits which have been determined by adoption of the annual accounts, and with the adoption of the distributions. This is carried out to the extent that the equity (total assets and liability) of a BV exceeds the reserves which have to be maintained by virtue of law or the articles of incorporation. A BV’s articles of association may limit the powers of the general meeting of shareholders or it may attribute them to another body of the BV. Reserves may not be distributed, if this is stipulated by law or if this is stated in the BV’s articles of association.
The law sets out that a shareholder’s resolution pertaining to a distribution or dividend only has legal effect once it has been approved by the BV’s board of directors has approved. The board of directors has to perform a distribution test. It will have to ascertain whether, after the distribution, the BV will be able to continue the payment of its due and collectable debts. The board of directors may only deny approval of the distribution if it knows or reasonably ought to be able to foresee that the BV, after the distribution, shall no longer be able to continue the payment of its due and collectable debts. A – careful and prudent – liquidity forecast for at least the coming business year is advisable. Future foreseeable changes which take place after more than one year should be taken into account as well. The legislation also requires the board of directors to include the debtors’ interests in the distribution test– and to let them prevail over the shareholders’ interests. Earlier this year, the Dutch professional organization for accountants (known as the NBA) published a guideline for both tests. It may therefore be helpful to instruct an accountant to assist with the forecasts.
A shareholder resolution on dividends is null and void unless the balance sheet test is performed correctly. If, in the meantime, the payment has taken place, such payment is undue and may be reclaimed from the shareholder who has received it. The directors, who are most likely to have performed the payment, may be liable if the shareholder cannot repay the amount.
If the board of directors approves the shareholder resolution without correct performance of the distribution test, the board of directors will be liable in the event of insolvency. Each director – and each decision-maker – is personally liable for any deficits that may arise by the distribution, as well as for the statutory interest as of the date of the distribution. Under such circumstances, a director or decision-maker can be released from such liability. Furthermore, the shareholder(s) can be obliged to repay the payments received, unless the shareholder(s) knew or could and must have foreseen that the BV following the dividend payment, would no longer be able to pay its debts.
Given the significant risks for both the shareholder(s) and the board of directors, it is advisable to put any dividend payment or other distribution in writing. It is highly advisable that the corporate documentation proves that the balance sheet test and the distribution test meet all legal requirements.
We will gladly assist you in this!