Governance in times of crisis – A company director’s manoeuvring room and liability

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The director of a company falling on (financially) hard times will sometimes find himself forced to take decisions at a quicker pace than legal doctrine would prescribe. It can leave directors (and supervisors) having to negotiate a minefield, never sure whether they will make it across in one piece.

Some important questions and considerations

Cashflow shortages will cause a company’s board of directors to seek the aid of its bank (ratios will have become skewed, causing lines of credit to become due, or other lending room to no longer be available). This will then be followed by conditions being renegotiated, the company being restructured (with unprofitable elements sold off) and costs being brought down. This will more often than not also see greater solvability called for through the increase of a company’s equity. Shareholders will also have to contribute either funds, or put up security, with a secondary offering of shares the obvious option open to floated companies.

Directors are tasked with finding a way to ensure the continuation of the enterprise during the hectic period it negotiates with its bank. Are they free to decide which of its creditors to pay first? Are they free to conclude new deals on the company’s behalf? In principle, directors are offered a lot of freedom when it comes to corporate decision-making. Risk-avoiding behaviour is not conducive to creating a vital and innovative economy. What leeway a director will have is largely dependent on the company’s realistic prospects of survival.

Continuation of the company should no longer be pursued i) in the event of an imminent cashflow shortage in the short term; ii) if no budget can be drafted in which predictable shortages are accommodated; and iii) if no plans are found to exists to suggest the company may, in time, be expected to turn a profit.

The company should neither be subjected to counteracting measures that are doomed to fail, or to a restructuring against better judgement. Any assessment on this should weigh up any damage such may cause the company’s creditors against the chances of its board of directors successfully saving the company, something which could, in turn, improve the position of its other stakeholders, as well as its creditors.

Should the company, however, prove de facto insolvent, i.e. beyond saving, then this would not only see other rules apply, but even the game itself changed. Such cases would no longer see the company’s survival, but the protection of the interests of its creditors take centre stage. The only remaining options open to its directors would then be filing for a suspension of payment or bankruptcy (with the latter potentially preceded by the appointment of a silent administrator, with whose help a pre-pack to take effect upon the company’s bankruptcy might be agreed).

Directors either underestimating the situation, or turning a blind eye to it, run the risk of later being held liable by the company’s receiver (as well as by some of its individual creditors). In fact, receivers have a plethora of laws available to them in this regard, the main one of these being articles 2:138/228 paragraph 2 DCC (which provide grounds for liability claims for asset shortages in cases of an actual improper performance of duties deemed a main cause of bankruptcy). In defending himself against such a claim, the director will then be encumbered with demonstrating that the company did have a chance of survival and that its continuation was justified, if not necessary. Such considerations will have to be evidenced by items such as carefully drafted minutes to the company’s decisions.

A minute account will have to be taken of the company’s state of affairs; its potential for continued survival; what conditions will have to be met to allow such to be achieved; and how it serves the interests of the various stakeholders.

Recommendations to directors in hard times on avoiding being personally held liable

Make sure you are properly equipped and fit for the job

Adequately setting up a restructuring process is an entirely different undertaking to the steady day-to-day running of a company, or growing its turnover.

Setting up a restructuring committee may be a good idea here. Such a committee would consist of both Executive (EB) as well as Supervisory Board (SB) members, to be added to with financial advisers, investment bankers, (tax) lawyers and accountants, depending on the nature of the problems faced. A restructuring committee may help you as you carefully prepare the (far-reaching) decisions of your company’s various bodies.

Multiple scenarios featuring calculated sensitivity analyses (a Plan B) will be considered in such an exercise. These will most likely be the management case, bank case and worst-case scenarios. Stakeholders (including the bank) vital to the rescue operation will have to be involved in the drafting of the rescue plan. A contingency plan describing the risks and consequences of the failure, or mere partial success, of certain scenarios will also have to be drafted.

Make sure you act in a sufficiently speedy manner

Communications between the company’s EB and SB will have to be intensified; a multitude of urgent information will have to be gathered; decisions will have to be made in as diligent a fashion as possible, in spite of the pressing time constraints you are under; and external communication will also have to proceed in an adequate manner. Because once rescue attempts are found to have been undertaken in vain, those looking in will be all too quick to say it was all too little, too slow.

Find out what type of investigation you need to conduct

You’ll have to look into different issues, depending on the problems your company’s facing, e.g. accounting issues, fraud, etc.

Staying or going

You may well feel inclined to take responsibility for the crisis your company finds itself in and step down from your post. After all, the buck does stop with those running it, doesn’t it? EB (and SB) members are expected to undertake all efforts to limit any damage they can and prevent any future damage from being incurred. Individual directors may be best advised to step down in the event of an irreconcilable dispute within a company’s EB (and/or its SB). One should be mindful of the reputation damage staying on too long, or stepping down too early, may cause.

 Liability Risks

The greatest liability risk will arise in the event the company is declared bankrupt. Receivers may then prove eager in looking into the potential for successfully claiming damages on the grounds of director’s liability. Such an investigation will no doubt find issues that could have been done better. That is not to say that such would immediately qualify as seriously culpable conduct, or be deemed an improper performance of duties. Hindsight will prove a great tool in reconstructing a company restructuring – a try-and-salvage-what-you-can – operation. A receiver will quite often also look into a company’s AC/IC and this will provide him plenty of easy pickings in this regard. Directors enjoying insurance coverage will often see (the threat of) claims for directors’ liability lodged against them, or such being settled out of court. Despite the high threshold set by the Dutch Supreme Court for deeming director conduct culpable to the extent that personal liability is triggered, lower courts should not be expected to always apply such restraint by way of subjecting a director’s conduct to a marginal test, and consider his actions in the context of the circumstances that existed at the time. Indeed they may even ignore such context under the influence of the benefit of hindsight.

Any creditors, banks, investors, etc. considering seeking to lodge a claim will usually have to make do without the information (including access to the company’s accounting records) and legal presumptions a receiver will have at his disposal.

DLA Piper’s Daphne Bens on trends in M&A: technology is on the rise

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One of the hottest topics at the moment is technology and its impact on the future of our jobs. FinTech, InsurTech, LegalTech, Blockchain and Bitcoin: these are more than simply fads or hypes. They represent a wave of development and innovation that will change the way we work forever. We look at how fast these developments are taking place, and how they will impact the legal profession.


Automation has become a part of many jobs in recent decades, making it possible for us to work faster and more efficiently. Now we face a new development, one that is called LegalTechIt goes far beyond process automation: in fact, it will transform the way the legal sector works. Our work will become different, and as a result the legal profession’s business model will also evolve. However, this does not mean that robots can replace humans in pleading cases or negotiating. In the words of computer scientist Edsger Dijkstra, “The question of whether Machines Can Think… is about as relevant as the question of whether Submarines Can Swim.” So what does it mean then?

Embracing technology

Daphne Bens, a partner at DLA Piper, was interviewed about these technological developments in the legal profession, and M&A in particular (see the link to the video below). She explains, “Now’s the time to embrace technology. If you haven’t already, you’re late to the game. For us, technology is a tool that we use to improve our services. Instead of fearing it, you need to get on board and start using it.”

“DLA Piper gathers its own data, and we’ve purchased software to help us analyse that data. We use a software tool that’s capable of scanning large volumes of contracts for specific clauses. Rather than putting a bunch of young lawyers in a room to do a monotonous and tedious job, we now use the computer for that first analysis. Our people then identify the parts that are actually relevant for the client. The job becomes more interesting for young lawyers this way too. Instead of entering data, we move straight on to analysing it and examining the results.”

Transparent data

“As technology advances, the world is becoming more and more transparent. For instance, our firm publishes a ‘Trend Report’ several times a year, with a data analysis of the legal terms from over a thousand transactions. Rather than keeping all that information to ourselves, we wanted to give back to the market and share our analyses with our clients and with each other. More and more legal facts about transactions are being made public. If the legal element is public, transparent and understandable, you can shift more of your focus to your client’s strategic interests. The ‘consultancy’ role of the legal profession is becoming more important, and lawyers need to offer a bird’s eye view of the problems, as well as a clear understanding of their client’s sector.”

Human element

“At the same time digitisation carries a risk: you need to make sure that you don’t forget about the human element. If you don’t, if you get caught up in a very long process without any human input, you run the risk of overlooking certain issues until it’s too late.”

So the conclusion is that we need to embrace the technology. Make it work for you, by using it to perform fast and efficient analyses of data and contracts. However, you must not lose sight of the human element: human input is, and always will be, vitally important.

About Daphne Bens

A partner at DLA Piper, Daphne Bens has extensive experience with advising clients, multinationals and listed companies on complex cross-border mergers and acquisitions. Daphne’s work involves mergers and acquisitions, private equity and corporate law. As well as her M&A practice, Daphne also advises clients on general business matters. Her particular areas of focus are the Technology and Hospitality & Leisure sectors, where she is part of DLA Piper’s core teams. Daphne spent 2002 on secondment at DLA Piper’s offices in Hong Kong and Singapore.

Watch the full interview (in Dutch) with Daphne Bens:


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Social entrepreneurship is a typical 21st century phenomenon. Essential and spot on, that is. Red hot: the time is now. Social responsibility, participation, sustainability and quality of the environment are all key words. Stakeholders want their companies to get involved, and companies want recognition for their social entrepreneurship. But what part could our corporate law play in this? Could we have a social entrepreneurial limited liability company?

The primary goal of social entrepreneurial companies is to meet high standards of social and environmental performance, sustainability, accountability and transparency. They take social and environmental issues into consideration when conducting their activities. Note though, that this is not the same as ‘non-for-profit’. The social entrepreneurial company is definitely for the purpose of profit, but not just for that; it conducts its activities also from a social and environmental point of view, stating that such standards are more important than maximizing profits.

In the Netherlands, several private organisations deal with certificates granted to companies which are more involved with social and environmental issues. Such a certificate can be obtained if the company meets certain social conditions. It usually expires after one year, which encourages companies to maintain their social entrepreneurship status. Most certifications include an annual audit, as is the case for example with the Keurmerk Sociale Onderneming. This particular certificate might be considered a Dutch version of the (global) private certification issued by a global non-profit organisation called ’B-Lab’ from Pennsylvania, USA.

Companies that have been granted a ‘B-Lab certificate’ are called ‘Certified Benefit Corporations’ or ‘B-Corps’. B-Corps should meet rigorous standards of social and environmental performance. Depending on the State, it is possible to actually incorporate a B-Corp in the US. This is a new legal form. B-Corp legislation is state law, yet effective in over half the country. The B-Corp meets the need of an enterprise to really demonstrate itself as a social enterprise.

Recently, the Dutch Social and Economic Council (SER) issued advice on the development of social entrepreneurship. It encouraged the Dutch government to take measures. These included investing in impact analyses, increasing knowledge, researching the possibility for labelling social companies and improving the finance climate.

Now let us take this one step further: why shouldn’t labelling social companies not include the formation of an actual social company. Innovative corporate law. The existing legal forms of entities under Dutch law are a ‘closed shop’. The social company should thus be incorporated within the existing legal entities, for instance within the private limited liability company (‘B.V.’). SER acknowledges the importance of labelling social companies, however it does not immediately opt for social companies to be a distinct class of companies, unlike the B-Corp. But why not?

A practical solution might be to create a social BV company. Recognizable and therefore inspiring to others. The Dutch legislature could arrange for ‘an earmark clause’ within the Dutch Civil Code. This clause could provide for additional wording which could be added to the statutory goal of the BV, in order for it to qualify as a social company. At the same time this could be combined with additional (annual) audit or reporting requirements, for accountability purposes. This would ensure that a company maintains its high social and environmental standards in practice. The arrangement would be non-compulsory and incorporators, or shareholders and officers, may choose whether or not to insert it such a clause in their by-laws and comply with it.

Which leaves the main question: which abbreviation to use with “B.V.” to indicate that we are dealing with a social enterprise? Perhaps ‘B.V.S.’? Or B-B.V.? Food for thought. Nonetheless, it would provide for concrete recognition of social entrepreneurship, and at the same time inspire other entrepreneurs. Now that is certainly worth a try.”


Maarten P.P. van Buuren,
Lecturer business law Leiden University and business law attorney with WLP Law, Amsterdam

Rescue of businesses in distress: shaping the insolvency and restructuring landscape

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Since the global financial crisis, insolvency and restructuring law have been at the forefront of law reform initiatives in Europe and elsewhere. More specifically, the topic of business rescue appears to rank top on the insolvency law related agenda of both the EU and national legislators, faced by a rapid growth of insolvencies. In lights of these developments, the European Law Institute (ELI) started the Business Rescue Project in 2013. This project has the aim to develop a legal framework that will enable the further development of coherent and functional rules for business rescue in Europe. It resulted in a report of 375+ pages and some 115 recommendations.

Initiatives for reform at the EU level

The European legislator has considered the rescue of distressed business been already for several years. In 2011 the European Parliament published a resolution and expressed its aims with regard to insolvency law: “insolvency law should be a tool for the rescue of companies at Union level”, and also, that “a legal framework should be established that better suits cases of companies which are temporarily insolvent.”

The Commission subsequently employed many activities, this included a Resolution at the end of 2012 with a ‘Communication on a new European approach to business failure and insolvency’ (Communication). Also the Commission presented a proposal on the revision of the European Insolvency Regulation of 2000. These efforts all support the development of a more coherent legal framework for dealing with distressed businesses. In the following years the developments continued. In 2014 the Commission presented its ‘Recommendation on a new approach to business failure’ and in 2016 the Proposal for a restructuring directive was published. Therewith, the Commission promotes the furthering of a (legal) European business rescue culture.

Business Rescue Project: Project Design

Against this background, the European Law Institute (ELI) saw momentum in 2013 to launch an in-depth project on furthering the rescue of distressed businesses across Europe. For more information on the ELI, see On 3 September 2013, the ELI Council approved the proposal for a project on the ‘Rescue of Business in Insolvency Law’ (‘Business Rescue Project’). Professors Bob Wessels and Stephan Madaus were appointed as Project Reporters to lead this two-stage project.

The first stage comprised the drafting of National Inventory Reports and Normative Reports by National Correspondents (NCs) from 13 EU countries. In addition, an Inventory report on international recommendations from standard-setting organisations was prepared. Based primarily on these detailed reports, the second stage consisted of drafting the ELI Instrument on Business Rescue with recommendations for a legal framework enabling the further development of coherent and functional rules for business rescue in Europe.

Scope of the study

The Report contains recommendations on a variety of themes affected by the rescue of financially distressed businesses. The Report’s ten chapters cover: (1) Actors and procedural design, (2) Financing a rescue, (3) Executory contracts, (4) Ranking of creditor claims; governance role of creditors, (5) Labour, benefit and pension issues, (6) Avoidance transactions in out-of-court workouts and pre-insolvency procedures and possible safe harbours, (7) Sales on a going-concern basis, (8) Rescue plan issues: procedure and structure; distributional issues, (9) Corporate group issues, and (10) Special arrangements for small and medium-sized enterprises (SMEs) including natural persons (but not consumers).

Finalizing the report

The topics addressed in the Report are intended to present a tool for better regulation in the EU, developed in the spirit of providing a coherent, dynamic, flexible and responsive European legislative framework for business rescue. Mindful of the European Commission’s commitment to better legal drafting, the Report’s proposals are formulated as comprehensibly, clearly, and as consistently as possible.

In the first week of September 2017, during the General Assembly and Annual Conference of ELI in Vienna, the report on ‘Rescue of Business in Insolvency Law’, was approved as an official ELI Instrument. The Report consists of 115 recommendations explained on more than 375 pages. The report is also available here (SSRN) or here (ELI).

Launch Business & Liability Research Network

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On the 6th of December the Business & Liability Research Network (BLRN) was launched at Leiden University, the Netherlands. During this festive opening the BLRN research themes and the Opening Conference Business Resilience (25/26 January 2018) were presented. Thy Pham and Cees de Groot gave an overview of the research projects related to the theme of ‘Good Corporate Governance’, such as the project on Sustainability and M&A and the research on Liability in groups of companies. Reinout Vriesendorp and Niek Strohmaier  presented their  research projects on  ‘Distress and Insolvency’ concerning business failure and directors’ liability and touched upon the multidisciplinary elements of this research. Iris Wuisman and Morshed Mannan presented the research theme ‘Future Business Structures’. They addressed the impact blockchain may have on corporate governance and talked about their projects on Decentralised Autonomous Organisations build on blockchain protocols. Finally, more details about the Opening Conference were disclosed by Ilya Kokorin (see for more info on the conference:

After the presentations, the specially prepared ‘BLRN cake’ was cut into pieces by Joanne van der Leun, dean of Leiden Law School who together with Larissa van den Herik (vice dean) and many of the Leiden Law School staff members from different institutes celebrated the opening together with the BLRN members!

For more information, visit our website via or contact one of the BLRN members.

Iris Wuisman and Morshed Mannan join an international working group on blockchain governance

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Iris Wuisman and Morshed Mannan of the Company Law department attended a European workshop on blockchain and the law at the European University Institute (EUI) in Florence on 30 November 2017- 1 December 2017. The programme was organized by COALA (Coalition of Automated Legal Applications) LEX, a leading transnational group of lawyers, academics, computer scientists and entrepreneurs exploring the challenges and opportunities of blockchain technology, and was organized by the Robert Schuman Centre for Advanced Studies and Law Department of EUI.

There were five simultaneous working groups exploring identity and privacy, the enforcement of smart contracts, the regulation of initial coin offerings (ICOs), the implications of blockchain on governmental and public institutions and the governance of decentralised blockchain-based organisations. Iris was appointed as the co-coordinator of the governance working group, along with Christopher Wray, Chief Legal Counsel of Mattereum for the workshop in Florence.

After recapitulating the earlier activities of COALA LEX on the aforementioned topics, a series of breakout sessions were held. The governance working group was composed of legal researchers, lawyers, an entrepreneur and a philosopher of technology. As a result, the ensuing discussions unpacked the various elements of ‘governance’ and examined its components through a Hohfeldian analysis of rights (liberty rights, claim rights, power and immunity). This facilitated the creation of a nascent conceptual framework with which to understand the decentralised organisations emerging on the blockchain. The other working groups focused on the prospects of creating a European-level blockchain infrastructure, the possibility of using blockchain to fragment individual identity so as to protect privacy and reflect the plurality of a person’s identities, assessing smart contracts against European contract law doctrine and understanding the supranational and national regulation of ICOs in the EU and Switzerland. To build on this work, reports and scientific articles will be written, and as representatives from the European Commission were present during the workshop, it will hopefully contribute to EU policy and regulation of this fast-moving area.

Future scenario study on Long Term Value Creation and Takeovers

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After making proposals to Akzo Nobel, PPG demanded negotiations from Akzo’s board. Although formally PPG requested for a special shareholders’ meeting and Akzo’s president to be dismissed, the main contention was whether Akzo’s board was obliged to commence negotiations with PPG. In Court it was stressed that it is the board’s imperative to determine an appropriate reaction to PPG’s proposals after careful review. The actual assessment of the Enterprise Court centred on sustainability issues. The Court considered relevant that the proposals of PPG did not contain many, if any, commitments with regard to research and development, employment, pensions and sustainability issues. The Court omitted however to specify what substantive criteria can be used to assess the legality of Akzo’s actions or the content of PPG’s proposals (OK 29 May 2017, ECLI:NL:GHAMS:2017:1965).

Akzo Nobel is not an isolated case. Listed companies are under permanent threat. The potential distortion of corporate strategy and the consequences for corporate sustainability is not incidental, but structural: listed companies face perpetual threats from the market of corporate control. The market disciplines before it attacks. The external effects can be enormous. Listed companies have a large impact on both its stakeholders and wider society; potentially compromising social, humanitarian and ecological values. Added that there are conflicting views around the mandate of the function of company boards, whether it should be shareholder-oriented or company-oriented, otherwise stated: whether firms should maximize shareholder value or should protect firm-specific investments and the long-term value of the company as a whole. Notwithstanding the fact that some company law regimes, such as those in the Netherlands, may prescribe the company’s interest and the sustained success of its enterprise as the legal foundation for board actions in takeover attempts, it is not necessarily straightforward that directors adhere to this legal norm. To the contrary, the growing importance of the international capital markets seems to have disciplinary effects: boards have gained interest in increasing share price (FCLT Global 2016, Graham 1995). The best exemplary manifestation of short termism may be observed in corporate strategies predominantly designed around extensive mergers and acquisitions. It is highly undesirable, however, that trading in businesses supersedes the core activity of the company: to promote the success of the company over the long-term, as a matter of law and public interest.

That listed corporations are increasingly forced to focus on the short is identified by many public (OECD, European Union, Financial Stability Board, G30) and private (Aspen Institute, FCLT, JP Morgan) institutions. All recognize that these capital market trends could be detrimental to sustainable companies and could undermine the long run performance of economies. However the proposed countermeasures – supporting long term value creation – are unclear; share prices on the contrary are a fact of life. To create a more balanced view it is necessary to delve deeper into the concept of long term value creation.

We call for a future scenario study on Long Term Value Creation and Takeovers. Delphi conferences will be organised in January 2018. We ask for participation from regulators, the judiciary, businesses and academia to identify threats and opportunities to M&A practice, to forecast future scenarios and to develop instruments and policies to anticipate future developments in M&A. It is time to move beyond the long-term/short-term dichotomy.

This research is conducted within CBL / Business & Liability Research Network, Coherent Private Law research programme of Leiden University.

Authors: Thy Pham, Jelle Nijland, Tim Verdoes, Maaike Lycklama a Nijeholt.

The Story Behind Bankruptcy: When Business Gets Personal

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The number of bankruptcies in a specific period, and levels of debt, are well documented but little is known about the consequences of bankruptcies beyond the numbers. In this study, Dutch entrepreneurs who went through debt rescheduling after personal bankruptcy, were interviewed in order to gain an understanding of the private, personal and social implications of bankruptcy. During the interviews in this study, the entrepreneurs reflected on the early days of their business venture, the moment of first detecting the prospect of business failure, their personal experiences during business failure, and the aftermath of bankruptcy and debt rescheduling.

Bankruptcy Experience

The bankruptcy experiences of entrepreneurs illustrate that business failure is a phenomenon with profound personal and social consequences. The findings reveal multiple interlinked psychological, physical and social effects. The legal bankruptcy and debt rescheduling procedures, and their key representatives, such as the judge and bankruptcy trustee, play a surprising role in the processing of these consequences.

Ex-ante: In the run-up to a bankruptcy, entrepreneurs can lose their motivation; they don’t answer their emails, get behind on their administration, and generally just let things go. They are worried about what is going to happen, both for themselves and their families. This results in sleepless nights, making them emotionally unstable, tense and unpredictable, while at the same time, they are unable to rest. There is a continuous search for solutions, time and money. And, as the entrepreneur’s stress levels increase, the staff become increasingly demotivated, resulting in a downward spiral.

In Media Res: When personal bankruptcy is imposed by court order, a wide range of emotions can be observed. For one person, this can be resignation or relief, for another it is a truly bitter pill, and for yet another, bankruptcy can come totally out of the blue. For all the entrepreneurs, however, it can be associated with a deep sense of humiliation. It is a phase in which entrepreneurs become emotionally exhausted, and they and their partners suffer from psychological and physical problems. A frequently mentioned and related problem is that the settlement of the bankruptcy in the eyes of entrepreneurs takes far too long (for example, two and a half years). For a number of entrepreneurs, the demands of the debt rescheduling scheme at that time are also often too much.

Ex-post: A few months after their debt rescheduling ruling, the entrepreneurs settle down in somewhat quieter waters. In addition to frustration, fear and uncertainty about the future, there is an overriding sense of helplessness.

Effects of the Bankruptcy Experience

The findings uncover multiple interlinked psychological, physical and social effects. It is striking to see how severe the suffering — which included heart attack, alcohol abuse, suicidal tendencies and divorce — was in each of these cases.

As a first key theme, and given that the psychological consequences are far-reaching — such as burn-out, anxiety, loss of self-esteem, depression, and not least, grief — the findings indicate that family and friends play an important role in how the bankruptcy experience and the mourning are processed emotionally.

Bankruptcy procedure

The findings indicate that entrepreneurs feel insecure and anxious about the legal procedure because they often have no idea what their rights and obligations are. Because a personal bankruptcy and a debt rescheduling scheme for entrepreneurs are unknown and complex processes, they are highly dependent on the resources in their immediate vicinity (ie, legal aid or lawyers, bankers, accountants). If they cannot communicate well with these resources, they can easily fall into an ‘emotional pit’. When entrepreneurs gain more insights into their rights and obligations, or as one interviewee put it ‘if you have already been bankrupt once’, then they seem to know more of what to expect, and are no longer driven so much by these feelings of anxiety. However, communication is often far from perfect, and there is little or no direct contact. In some cases, entrepreneurs may have to deal with four or five different trustees, and contact often only occurs via email or the secretary.

A second key theme that emerges from the interview data is that entrepreneurs often have a need to be heard, and they do not understand why the legal process should be as devoid of emotion as it is. It feels like an ‘emotional punishment’, often because they are unable to let go of their business. comparable to losing a loved one; it is a psychological process similar to mourning. A lack of empathy, respect and transparency by the formal institutional representatives, such as judges, trustees and administrators, is an additional source of their grievance. In their eyes, it is unfair and incomprehensible that the legal system only works for the creditors and not for them. Because of this perceived non-cooperative, emotion-free treatment, the bankruptcy proceeding can be an extremely stressful grieving process, beside the emotions associated with business failure itself, contributing to the psychological and physical distress.

Discussion and implications

The interview data reveal two interrelated key themes. First, entrepreneurs who are in a debt rescheduling scheme after being declared bankrupt generally cannot personally let go of their demised business. They have a need to be heard, and cannot understand why the legal process is so devoid of emotion and so hostile to their personal interests. They feel this as ‘emotional punishment’, which hinders the way they cope with their loss. Secondly, support — in the form of family, friends, and business contacts — plays an important role in how a bankruptcy experience, debt rescheduling scheme and the mourning over the lost business are processed emotionally. In this context, it seems counter-productive that the legal system itself is perceived to impose a stigma on these entrepreneurs. Whether this perception results from the legal system imposing the stigma itself, or from entrepreneurs projecting onto this system their own sense of stigma — for example by projecting their own emotions onto the formal actors in the legal system — needs to be examined further.

Implications for Theory

This study found that the manner in which a trustee, judge or administrator treats an entrepreneur in a bankruptcy debt rescheduling scheme, can have severe negative emotional and motivational effects. In this way, the study connects insolvency law to the discussion of the role of emotion in law, particularly empathy. This area of research aims to shed light on the role of empathy in judging. The study thereby contributes to strengthening the ties between law and psychology in three ways. First, it is relevant to the theory of grief and recovery. We note that prior research primarily considers the informal social network in order to explain how entrepreneurs manage grief. The findings in this study suggest that, in a bankruptcy or debt rescheduling context, the role of a formal representative, in particular the trustee and administrator, may affect (ie moderate) the relationship between business failure and psychological symptoms, and thereby affect the speed of recovery. Second, the findings indicate that the formal role of a bankruptcy trustee (or judge), as well as (uncertainties about) the formal bankruptcy procedure, may affect emotional coping, and, subsequently, recovery. Third, the findings suggest that empathy — that is, responding with sensitivity and care to the suffering of an entrepreneur without breaching impartiality — deserves much greater research attention in bankruptcy law, as it may, for example, play a much greater role in the acceptance of a personal bankruptcy ruling, the mourning over the lost business and the subsequent second chance for entrepreneurs than is commonly acknowledged.

Implications for Practice

Discussions about the purpose of bankruptcy procedures have been (re-)opened in recent years, with much attention being paid to the early and cost-effective rescue of business. In an attempt ‘to avoid debt enforcement mechanisms that involve detailed and extensive court oversight’, preventive insolvency and out-of-court procedures are now considered a key European policy area to limit the economic and social effects of bankruptcy for entrepreneurs. The European Commission therefore, has recommended specialist judges and specialised training courses for formal representatives adjudicating in or administering the bankruptcy proceedings. Court-appointed trustees, whose salary is dependent on the estate’s funds, generally have multiple duties, including tracing fraudulent acts (eg, actio pauliana), for which there are not always enough funds in the estate to cover for the time required. In this context, trustees tend to behave in a formalistic, efficient and distrustful, maybe even sceptical way. As a result, bankrupt entrepreneurs may feel like suspected criminals which exacerbates their problems. Although the current wave of bankruptcy reform seems to focus on a second chance (to restart following bankruptcy), or to turn struggling businesses around via workouts, this study suggests that debate is necessary on how to deal with the entrepreneur’s emotions throughout the legal procedure. That is, it should be discussed whether trustees, administrators and judges should respond with care and sensitivity to the suffering of entrepreneurs in a bankruptcy or debt rescheduling procedure, and if so, in what way and to what purpose. In general, it should be discussed whether society as a whole needs to pay attention to the psychological and social impact of distressed entrepreneurs. We argue that a legal discussion on a ‘second chance’ cannot ignore how the legal process and its key representatives affect the psychological stress of failed entrepreneurs.

The aftermath of the financial crisis: Irish Life and Permanent Group Holdings plc

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From 2008 onwards, a number of Irish banks encountered serious financial difficulties resulting from the ongoing financial crisis. One of those banks was Irish Life and Permanent Group Holdings plc (ILP). In 2010, the legislature of Ireland adopted the Credit Institutions (Stabilisation) Act that gave the Minister for Finance the power to intervene in the banking sector. Under the Act, the Minister may (at the first stage) issue a ‘proposed order’ to a bank in which the Minister requests the bank to undertake certain measures, and may (at the second stage) apply to the High Court of Ireland to validate the proposed order by giving a ‘direction order’ to the bank. Under the Act, the High Court shall allow the direction order if the opinion of the Minister as expressed in the proposed order ‘is reasonable and is not vitiated by any error of law’ (para. 2 of the judgment of 31 July 2017). In late 2010, the Irish State came to an agreement with the European Commission, the European Central Bank and the International Monetary Fund to recapitalise by 31 July 2011 Irish banks that were regarded ‘viable’. As a result of this agreement, the Central Bank of Ireland required that ILP raise its equity capital by € 4 billion. However, as the High Court of Ireland noted:

‘On the balance of probabilities, the required capital could not have been raised from private investors’, ‘On the balance of probabilities, the required capital could not have been raised from existing shareholders’, and ‘On the balance of probabilities, failure to recapitalise by the deadline would have led to a failure of the Bank’(para. 8).

As a consequence, the Minister for Finance issued a proposed order that requested ILP inter alia to issue shares to the Irish State to the amount of € 2.3 billion, which would make the Irish State the 99.2% shareholder of ILP. The board of directors of ILP reluctantly agreed on implementing the proposed order, because it ‘considered that the Company had no other option available to it in terms of achieving the required recapitalisation’ (para. 8). However, an extraordinary general meeting of shareholders of ILP that was held on 20 July 2011 rejected the proposed order, because it ‘wished to explore other potential avenues for the raising of the required capital’ (para. 8). The Minister then asked the High Court to give a direction order to ILP in conformity with the proposed order. On 26 July 2011, the High Court granted the Minister’s request for the direction order. As the High Court considered: ‘The decision by the State to invest in the recapitalisation was made in fulfilment of its legal obligations and in the interests of the State’s financial system, the citizens of the State and the citizens of the European Union’ (para. 8).

Following this judgment, a number of interested parties appealed to the High Court to set aside (or at least vary) the direction order. This appeal, in the case of Dowling & others v The Minister for Finance & others, led to two subsequent judgments of the High Court. In the words of the High Court, the appeal could be successful only if the court would find that the opinion of the Minister for Finance that led to the direction order ‘was unreasonable or was vitiated by legal error’ (para. 4).

On 15 August 2014 the High Court delivered a first judgment in this case. In this judgment, by Ms. Justice Iseult O’Malley, the court considered on the earlier application by the Minister for Finance for a direction order: ‘The Court would be conscious of the fact that the application might be made in circumstances of urgency, where time would not permit of exhaustive analysis. The Court would also have due regard to the role and responsibilities of the Minister, and to the fact that the Minister would have had access to expert advice in forming the opinion’ (para. 12).

On 31 July 2017 the High Court delivered a second judgment. In this judgment, the court considered: ‘The risks created by the Bank’s situation were considered to be very real by the State, the Commission and the External Partners, and I accepted the reality of those risks. […] The proposition that there was no need to intervene, and therefore no need to dilute the shareholders’ rights […] ignores […] the catastrophic possibility of the collapse of the financial system in this State, with the consequential effects in other member States’ (para. 75).

For these reasons, the High Court dismissed the applicants’ appeal.

The judgment of the High Court of Ireland can be found at:, English, judgments & determinations, judgments by court, High Court, 2017, 31-07-2017 Dowling & ors v The Minister for Finance & ors.

Piercing the corporate veil: an almost impossible task

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A number of oil companies, including Texaco Inc., conducted oil exploitation and extraction activities in the Oriente region in Ecuador in the period 1964 to 1992. These activities led to environmental pollution. In 1993 47 inhabitants of that region, representing approximately 30,000 people, brought proceedings against Texaco Inc. in the U.S.A.. These proceedings were dismissed. Texaco Inc. acknowledged that proceedings could be submitted before an Ecuadorian court and that it would be bound by the outcome of the proceedings. The proceedings in Ecuador started in 2003. These proceedings were brought against Chevron Corporation because at that time Texaco Inc. had become part of the Chevron group of companies. The result of these proceedings was a judgment against Chevron Corporation to the amount of US$ 9.5 billion. Chevron Corporation stated that it was unwilling to satisfy this judgment, inter alia on the argument that ‘the Ecuador Judgment was obtained by fraudulent means and rendered by a systemically corrupt and biased court’. For that reason, the claimants started proceedings in Canada not only against Chevron Corporation but also against Chevron Canada Limited. Their aim was to execute the Ecuadorian judgment against the indirect subsidiary company Chevron Canada Limited. Thus, the Ontario Superior Court of Justice had to go into the question of whether the Ecuadorian judgment against Chevron Corporation could be enforced against Chevron Canada Limited. The claimants in this case argued that the question should be answered positively. One ground by which the claimants argued this should be the case was ‘that the court should pierce Chevron Canada’s corporate veil to make its shares and assets available to satisfy the Ecuadorian judgment because of Chevron’s total effective control over Chevron Canada’. However, the Ontario Superior Court of Justice did not accept this reasoning. In general terms, the Court considered as follows:

‘The principle of corporate separateness provides that shareholders of a corporation are not liable for the obligations of the corporation. It also provides that the assets of the corporation are owned exclusively by the corporation, not the shareholders of the corporation. As a result, Chevron does not have any legal or equitable interest in the assets of Chevron Canada as an indirect shareholder’.

The foregoing would be different only if the claimants could argue that there were sound reasons for lifting the corporate veil. This would be the case if the relationship between Chevron Corporation and Chevron Canada was such that Chevron Canada ‘is completely dominated and controlled and being used as a shield for fraudulent or improper conduct’ by Chevron Corporation. But this was not the case:

‘The evidence does not establish that Chevron Canada is Chevron’s “puppet”. Rather, I find that Chevron and Chevron Canada have a typical parent/subsidiary relationship. Chevron does not exercise complete dominance or control over the affairs of Chevron Canada’.

The judgment underlines the difficulties claimants in (international) cases of environmental pollution have in succeeding in their claims where the pollution was caused by an offshore subsidiary company that is part of a corporate group.

Source: Ontario Superior Court of Justice (Hainey J.) January 20 2017, 2017 ONSC 135 (Yaiguaje et al. v. Chevron Corporation, Chevron Canada Limited & Chevron Canada Finance Limited), at:, superior court of justice, decisions of the court, search decisions superior court of justice.