During the Dutch company formation process some agreements can be signed by a BV i.o., a Dutch limited liability company in formation. When acting for a BV in formation, a number of specific regulations apply. In this article there will be a look into detail to the BV i.o. Taken into consideration are the company in formation, applicable regulations, liability matters and the circle of person that can be held liable for acts on behalf of a company in formation.
The BV in formation
Under Dutch law the BV is only established when incorporated. That is the moment at which the notarial deed is executed. Yet often there are actions that have to be performed before the moment of incorporation. Specifically, this is the case for agreements that the incorporators of the BV (or others) already want to conclude for the BV, whereby it should be clear that the BV will become the contracting party (and not the incorporators in private).
Such actions are executed on behalf of a BV in formation, also called the BV i.o. I.o is an abbreviation of the Dutch words ‘in oprichting’, meaning ‘in formation’. The regulations concerning the BV i.o., however, differ from the normal rules concerning actions that are executed on behalf of a BV.
The difference between a BV in formation (BV i.o.) and an already incorporated BV is important when acting for the BV i.o. This is only regarding legal acts (acts that have a legal effect, such as concluding an agreement). Other regulations apply to acts that are classified as unlawful acts (onrechtmatige daad).
Acts on behalf a company in formation
Acting on behalf a BV in formation is possible by stating that you act for the BV i.o. It is possible, for example, that a BV in formation is a contracting party in an agreement.
However, not every agreement concluded or act performed in this way by the BV in formation is subject to the regulations concerning the BV in formation. For example, actions that show that they were actually done in private or for another company (often a sole proprietor (ZZP’er) or general partnership (VOF) that will at a later moment be converted into a private limited company) cannot be classified under the rules discussed below. This also has consequences for the possibilities for ratification and liability matters.
Liability for acting on behalf a company in formation
As long as the BV has not been established, the person acting on behalf of the BV i.o. will be jointly and severally liable for the actions that are taken. This person therefore basically guarantees its private assets. This is a clear difference with the already incorporated BV, where the personal assets of the persons acting on behalf of the BV are separated from the assets of the BV itself.
It is important to know that everyone who performs a legal act on behalf of a company in formation is jointly and severally liable for the obligations involved. This can be relevant for the future founders and directors of the BV, however, it can also be that others are held jointly and severally liable because of any involvement in action performed on behalf of the BV i.o.
It is important to explicitly exclude any joint and several liability with the other contracting parties involved in agreements with the BV in formation. It is of course advisable to record in writing the exclusion to avoid discussions afterwards.
Ratification by the BV
Once the BV in formation has been incorporated, the BV will have to ratify the obligations that were already entered into. This can be done both explicitly and tacitly.
Only after the (legal) acts have been ratified, the BV can be held liable. After ratification, the joint and several liability for the persons that acted on behalf of the BV i.o. is canceled (but there is another liability, see the section below).
There are a few exceptions, where it is possible for the founders of the BV to bind the BV in formation and where ratification will not be required:
– issuance of shares;
– accepting deposits on shares;
– appointment of directors;
– appointment of supervisory directors;
– doing incriminating legal acts;
– paying formation expenses.
Non-performance confirmed obligations of, for example, founding
After the limited liability company has been incorporated and the actions that have been carried out before incorporation have been ratified, the obligations that follow from it must also be fulfilled. If these obligations are not met, the BV can be called to account.
However, not only the BV will be liable. Even those who have acted for the incorporation of the company can still be liable, despite ratification. This is the case when they knew, or should have known, that the BV could not fulfil its obligations. If the BV ends up in bankruptcy within one year after incorporation, the burden of proof is reversed: the person who has acted on behalf of the BV i.o. will then have to prove that it did not know or could know that the BV could not fulfil its obligations.
In addition to this liability of those who have acted, those who have ratified the acts of the BV in formation (the board of managing directors) can be held liable too.
The relevant regulations are complex and there are no standard remedies in case of disputes. It is wise to consult a lawyer in advance to have potential conflicts signalled and the best approach to mitigate risk provided.
The BV in formation – Conclusion
Acts can already be executed on behalf of the BV i.o before its incorporation, but such acts bear the risk of personal liability, even after ratification by the BV. It is therefore wise to take sufficient care when acting for a BV i.o.
The rules concerning the BV in formation and the liability of founders, directors and representatives of a BV in formation are complex. In (imminent) conflicts, it is advisable to request for legal assistance.
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