PIBL - Week 7 Director's Liability & Recognition and Enforcement

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Directors’ Liability: Applicable Law > Introduction

Today Gruma B.V . will consider:

Scenario 1: Can Stephan be held liable?

  • Stephan, a director and shareholder of Gruma B.V ., authorised IT-services (EUR 30,000) without the consent of Frits, also a director and shareholder

  • Articles of Association state that each director requires the consent of the shareholders for all contractual dealings exceeding EUR 10,000

Scenario 2: Embezzlement

  • Stephan discovers that Frits, who is domiciled in Germany, embezzled funds from the company

Scenario 3: Insolvency

  • Gruma B.V . is forced to enter into insolvency

  • However, Frits and Stephan continue to carry on the business as usual

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Directors’ Liability: Applicable Law > Internal vs External Liability

Key questions:

  • Which duties are breached?

  • Is there a contract between the parties? (NB: Does not always need to be a contract)

  • Which party is initiating the claim?

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Directors’ Liability: Applicable Law > Which law applies? (Assuming Dutch courts have jurisdiction)

Re-cap: Questions of applicable law are largely answered by Rome I Regulation (contractual issues) and Rome II Regulation (non-contractual issues)

However, majority of cases won’t apply to directors’ liability => no specific

category for directors’ liability

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Directors’ Liability: Applicable Law > Which law applies? (Assuming Dutch courts have jurisdiction) > answering questions regarding directors’ liability (internal)

Majority of cases: law that governs internal structure of company => lex societatis (internal structure of the company), also governs relationship between company and its organs

  • Exception: tort cases => applicable law may also be established on the basis of Rome II Regulation but also refers to relationship of company

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Directors’ Liability: Applicable Law > Which law applies? (Assuming Dutch courts have jurisdiction) > answering questions regarding directors’ liability (external)

  • In most cases with external liability => no direct relationship between director themselves and third party

  • Sometimes, if the third party is initiating the claim on mismanagement – (i.e. shareholder) the claim itself is so closely linked to duties that someone has as a director, law that governs the company will prevail

  • In other situations, where there’s no direct tie to company law and the duty that someone has as a director => instead classified as tort

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Directors’ Liability: Applicable Law > Which law applies? (Assuming Dutch courts have jurisdiction) > Rome I Regulation

Scope

  • Temporal scope: contracts concluded from 17 December 2009 (Article 28)

  • Substantive scope: Article 1

  • Formal scope: Article 2 (universal)

Exclusion (Article 1(2)(f))

  • Establishes that it doesn't apply to questions governed by the law of companies

  • Personal liability of officers and members of the company => issues of directors’ liability is fully excluded from Rome I Regulation

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Directors’ Liability: Applicable Law > Which law applies? (Assuming Dutch courts have jurisdiction) > Law of Companies

No uniform/harmonised private international law

Therefore: a need to revert to national private international law

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Directors’ Liability: Applicable Law > Incorporation Theory vs Real Seat Theory

  • Idea: to have a law closely connected to company itself, governing that company's internal structure

  • When determining applicable law to the internal structure of the company => does it apply the incorporation theory or real seat theory?

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Directors’ Liability: Applicable Law > Incorporation Theory vs Real Seat Theory > Incorporation theory

E.g. Scandinavia, the Netherlands, Belgium, Switzerland, UK, US

The law of where the business is incorporated / has its statutory seat

  • Real location of business is irrelevant

  • NB: Risk of pseudo-foreign companies => not a genuine connection to the law governing the company

Much party autonomy => allows parties to choose where to set up their business, knowing that the law of their statutory seat is going to govern the internal structure

How it is applied: Gruma B.V . => “B.V .” refers to the statutory seats for a

private limited company

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Directors’ Liability: Applicable Law > Incorporation Theory vs Real Seat Theory > Real Seat theory

E.g. France, Luxembourg, Portugal, Spain, Greece, Italy

The law of the place of central administration/ operational headquarters

  • Place where you operate your business => the law of that place should govern the internal structure of the business

  • Genuine connection between the applicable law and the location of the business

Limited party autonomy

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Directors’ Liability: Applicable Law > Application to Scenarios > Scenario 1 > Corporate law liability

What type of liability are we trying to establish?

  • Internal liability => the business is seeking to hold Stephan liable

This is a duty that stems from Articles of Association, what sort of liability is

this?

  • Articles of association => company law

Corporate law liability => lex societatis

  • Which court has jurisdiction?

    • determines applicabel law

  • Which doctrine do they adhere to?

    • Incorporation theory or real seat theory

  • Where is Gruma incorporated?

    • both located in the Netherlands

  • Where is Gruma’s real seat?

    • both located in the Netherlands

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Directors’ Liability: Applicable Law > Application to Scenarios > Scenario 2 > Tort (scope)

Temporal scope: 11 January 2009

Formal scope: Article 3

Material scope: Articles 1 and 2

  • NB: Exclusion of directors’ liability (Article 1(2)(d))

Exclusion of “(...) the personal liability of officers

and members of such

  • However, embezzling funds of business is not part of day to day tasks directors are performing => Article only excludes obligations of the company or body

  • Independent torts under internal liability are covered by Rome II regulation => exclusion only applies to liability for obligations that are part of company law / part of the everyday tasks (e.g. mismanaging a company)

What does this mean

  • Internal liability => Only independent torts

  • External liability => mostly covered by Rome II Regulation

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Directors’ Liability: Applicable Law > Application to Scenarios > Scenario 2 > Tort (choice of law)

under Rome II Regulation, first looks at Article 14 => allows parties to agree to a choice of law

  • Could be that the contract between Gruma B.V . and director says that Dutch law will govern the relationship between the parties whether contractual relationship or not => then on the basis of Article 14 this choice of law will prevail

  • If no choice of law: move onto general rule of Article 4 (general

    rule)

    • Article 4(1) => the place where direct damage arises will provide the applicable law

    • Lex loci damni

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Directors’ Liability: Applicable Law > Application to Scenarios > Scenario 2 > Tort (choice of law) > exceptions

Article 4(2): common habitual residence => not

relevant in this scenario; Frits lives in Germany

Article 4(3): manifestly closer connection

  • Might exist in a pre-existing relationship between the parties (e.g. a contract) => in such a situation, Article 4(3) refers back to the company law relationship that exists between the parties

  • Thus, on the basis of Article 4(3), the law that governs the internal structure of a company will also govern a tort

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Directors’ Liability: Applicable Law > Application to Scenarios > Scenario 2 > Tort (choice of law) > Overview

Internal liability: law that governs company will prevail (lex societatis)

External liability: sometimes law that governs the company will prevail => sometimes in cases of external iability there's a clear case of mismanagement which is so closely related to company law situation that internal law that governs company will prevail

The Netherlands: Article 10:119(e) DCC => liability in addition to the company

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Directors’ Liability: Applicable Law > Application to Scenarios > Scenario 3 > Insolvency

Gruma B.V . almost on the verge of bankruptcy, but still enters into large

contracts knowingly

  • Directors acted maliciously and to the detriment of general body of creditors => creditors that business already had will most likely not get paid

  • Liquidator may state that directors mismanaged the company leading to bankruptcy => will initiate the claim on behalf of creditors

    • Such claims considered so closely related to insolvency proceedings that the courts with jurisdiction over insolvency proceedings and also have jurisdiction over insolvency claims

Article 7(1) Insolvency Regulation

  • Lex concursus => law where insolvency proceedings are opened

  • Insolvency proceedings and their effects are subject to the law of the country in whose territory the insolvency proceedings are opened

  • Does this apply to the liability of directors?

  • In most cases insolvency claims considered so closely related to insolvency itself, rules of Insolvency Regulation prevail

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Exam question 1:
Frits, domiciled in Kleef, Germany is one of three board members of Gruma B.V . (a Dutch private limited company with headquarters in Utrecht, the Netherlands). As chief financial officer (CFO) Frits is responsible for the financial actions of the company. His main duties include tracking cash flow, financial planning and analysing the company’s financial strengths and weaknesses. While discussing the outsourcing of IT-services, Frits argued in favour of a company called Bright IT GmbH (a German private limited company, situated in Düsseldorf, Germany). A contract amounting to €

325.000 per annum in IT-services was subsequently concluded with Bright IT (in May 2018).

In December 2020, Stefan, board member and CEO of Gruma, discovers that Bright IT is primarily owned by Frits’ son and that Frits holds 25% of the shares in Bright IT. Frits failed to mention these facts during the discussion about the outsourcing of IT-services. Moreover, it turns out thatthe services provided by Bright IT are up to 40% more expensive than similar services offered by other IT companies. After his discovery, Stefan comes to you– as legal counsel- and states that he (as Gruma’s legal representative) wants to sue Frits for mismanagement and failure to act in the company’s best interest. Both Germany andthe Netherlands apply the incorporation theory. What type of liability is Gruma seeking to establish?

Key points:

  • NB: In the decision-making process, conflicts of interest must be declared and means you cannot vote as a board member

  • What sort of liability is Gruma B.V . seeking to establish?

    • Issue within the company

    • Gruma B.V . is initiating the claim

    • Thus => Concerns internal liability

  • What type of internal liability?

    • Corporate law liability => these are the duties director has towards the company based upon company law, which were breached

    • Managing the company is one of his duties that stem from company law (can also be contract law, depending on what the contract says)

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Exam question 2:
In researching a proper response to Stefan’s wishes, you come across Article 2:9 Dutch Civil Code, which states that each director is responsible for the general conduct of affairs and liable for the full consequences of an improper performance of duties, unless he is not gravely to blame for such improper performance. Will Gruma be able to rely on article 2:9 of the Dutch Civil Code? In other words: does Dutch law govern the claim for liability?

Key points:

  • Which court has jurisdiction?

    • Frits can be sued in Germany (Article 4 Brussels Ibis Regulation)

    • Frits can be sued in the Netherlands (Article 7(1) Brussels Ibis Regulation)

    • Both in Germany and the Netherlands => law of incorporation theory governs internal structure of company => connection to lex societatis

    • Lex societatis: law where statutory seat of Gruma B.V . is located

  • Statutory seat is located in the Netherlands => Dutch law applies

Thus, Gruma B.V . can indeed rely on Article 2:9 Dutch Civil Code => Dutch law governs the claim

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Recognition and Enforcement of Foreign Judgements

Practice Scenario: Gruma has obtained a judgment from the Dutch court condemning a French company (with headquarters in France) to pay Gruma EUR 25.000 in damages for copyright infringement

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Recognition and Enforcement of Foreign Judgements > Are there international instruments facilitating recognition and enforcement? > Brussels

Brussels Ibis Regulation

  • Aims to establish free circulation of judgements => as straightforward to enforce a Dutch judgement in the Netherlands as it is to enforce a Spanish judgement in the Netherlands

  • Before: Declaration of enforcement (obtained by the court) needed => exequatur

Currently: Prior approval by court not necessary with Brussels Ibis Regulation

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Recognition and Enforcement of Foreign Judgements > Are there international instruments facilitating recognition and enforcement?

  • Brussels Ibis Regulation

  • Lugano Convention 2007

  • HccH Choice of Court Convention 2005

  • HccH Judgments Convention 2019

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Recognition and Enforcement of Foreign Judgements > Are there international instruments facilitating recognition and enforcement? > Lugano Convention 2007

Exequator procedure still exists for enforcement of judgements

Mostly mimics Brussels Ibis Regulation for other issues (e.g. reasons for

not enforcing judgements, etc.)

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Recognition and Enforcement of Foreign Judgements > Are there international instruments facilitating recognition and enforcement? > HccH

HccH Choice of Court Convention 2005

  • Albania, Bahrain, Denmark, EU, Mexico, Moldova, Montenegro, North Macedonia, Singapore, Switzerland, UK

HccH Judgments Convention 2019

  • Albania, Andorra, EU, Ukraine, Uruguay, UK

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Recognition and Enforcement of Foreign Judgements > Recognition and Enforcement of Foreign Judgements (Brussels Ibis Regulation)

NB: Issues of jurisdiction and enforcement have different foreign scopes than issues of jurisdiction

Formal scope: Article 2(a) Brussels Ibis Regulation => Applies to a judgment stemming from a Member State of the EU and doesn't matter whether that judgement was rendered on Brussels Ibis Regulation or where that defendant is located

  • Recognition (Article 36) (no special procedure)

  • Enforcement (Article 39) (enforceable if enforceable in Member State of origin)

  • Refusal

  • No substantive review (Article 52)

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Recognition and Enforcement of Foreign Judgements > Recognition and Enforcement of Foreign Judgements (Brussels Ibis Regulation) > Recognition

(Article 36) (no special procedure)

Recognition occurs immediately

  • Prevent recognition => by initiating claim before the courts saying that this judgement should not be recognised and list grounds in Article 45 of Brussels Ibis Regulation (grounds for refusal)

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Recognition and Enforcement of Foreign Judgements > Recognition and Enforcement of Foreign Judgements (Brussels Ibis Regulation) > Enforcement

Article 39 (enforceable if enforceable in Member State of origin)

  • Judgement in a Member State will be enforced in another Member State without any declaration

  • What is needed: judgement must be enforceable in Member State of origin — if not, then not enforceable elsewhere

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Recognition and Enforcement of Foreign Judgements > Recognition and Enforcement of Foreign Judgements (Brussels Ibis Regulation) > Refusal

Recognition (Article 45)

  1. Contrary to public policy;

  2. Default of appearance (not served properly);

  3. Similar judgment between same parties in Member State addressed;

  4. Irreconcilable with earlier judgment;

  5. Conflict with rules for consumers, insured parties and employees

Enforcement (Article 46) => reference to Article 45

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Recognition and Enforcement of Foreign Judgements > Practice Scenario

Gruma is negotiating a contract with a Spanish company, with headquarters

in Barcelona, Spain. The Spanish company wants to subject any and all disputes arising from the contract to the exclusive jurisdiction of the Mexican courts. Will we agree to this?

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Recognition and Enforcement of Foreign Judgements > Practice Scenario > HccH Choice of Court Convention

General rules

  • Exclusive choice of court agreement in civil and commercial matters (Article 1)

  • Does not apply to consumer or employment contracts (Article 2)

Enforcement regime (Article 8)

  • Similar to that of the Brussels Ibis Regulation

Grounds for Refusal (Article 9)

  • Choice of forum null and void

  • Procedural fraud

  • Contrary to public policy

  • Irreconcilable judgments (same State, other State)

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Recognition and Enforcement of Foreign Judgements > Practice Scenario > choosing the Court

Will a judgment of this court be recognised and enforced where I need it to be

Under the HccH Choice of Court Convention:

  • Have not abolished equator procedure => necessary to ask courts to enforce such a judgement

  • More advantageous to go to the Spanish court than Mexican court, at least regarding recognition and enforcement => because under the Brussels Ibis Regulation, recognition is easier

  • However, HccH allows judgements to be recognised, especially with parties outside EU => much easier to engage in business with them and having the judgment recognised and enforced when needed to be

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Recognition and Enforcement of Foreign Judgements > Exam question 1
In December 2022, Gruma B.V . enters into a contract with an English

company that will design limited edition ‘vault shoe boxes’ for Gruma.

Contrary to the contract, the design is not completed by June 2023.

Grumatherefore decides to commence legal action against this company before the Dutch courts. In February 2024, the Dutch court ruled that the English company is in breach of contract. In accordance with the judgment of the Dutch court, the English company, with headquarters in London, UK has to pay Gruma € 7.000,- in damages. Will Grumabe able to enforce the Dutch judgment in the UK?

Key points:

  • Consider the instruments: Brussels Ibis Regulation

    • The UK is not part of the EU, therefore Brussels Ibis Regulation does not apply => So, cannot enforce this judgement under the Brussels Ibis Regulation

  • Alternative instruments

    • HccH Choice of Court Convention has exclusive choice of forum => no exclusive choice of forum for Dutch courts so cannot rely on this instrument

    • HccH Judgements Convention => Does not apply to UK for now

Conclusion

  • No international instrument in place to facilitate recognition and enforcement of judgement

  • Does not mean judgement cannot be enforced at all => it will be subjected to national (UK) rules

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Recognition and Enforcement of Foreign Judgements > Exam question 2

You –as legal counsel of Gruma-discover that the English company also has assets in Ireland. Would that change your enforcement strategy? Why?

Key points:

  • Ireland is part of the EU and will therefore apply the Brussels Ibis Regulation => so enforcement of the judgment will become easier

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Chapter 8 > Recognition and Enforcement of Foreign Judgements > How are foreign judgments recognized and enforced under EU private international law?

  • Within the EU: Governed by the Brussels Ibis Regulation.

  • From non-EU states: May depend on treaties (e.g. Lugano Convention, Hague Conventions).

  • If no treaty applies: National law of the enforcing Member State governs.

  • Recognition/enforcement affects both post-judgment execution and forum choice.

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Chapter 8 > Brussels Ibis Regulation > How does the Brussels Ibis Regulation handle recognition and enforcement of judgments?

  • Dual function: Regulates jurisdiction & recognition/enforcement.

  • Article 36(1): Judgments from Member States are automatically recognized without special procedure.

  • Applies to civil and commercial matters (Art. 1).

  • Recognition is possible even if based on national rules (not Brussels Ibis jurisdiction rules).

  • Only applies to EU judgments — not third-country judgments.

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Chapter 8 > Recognition > How is recognition of judgments handled under the Brussels Ibis Regulation?

  • Automatic recognition (ipso iure) of judgments from Member States — Art. 36(1).

  • Based on mutual trust between EU courts.

  • Not treated as domestic judgments — subject to limited review.

  • Art. 45: Recognition may be refused on specific grounds.

  • Art. 36(2): Parties may seek a declaration of non-refusal (negative declaratory relief).

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Chapter 8 > Effects > What are the effects of recognition under the Brussels Ibis Regulation?

  • A recognised judgment has the same effect in other Member States as in the state of origin (not as a domestic judgment).

  • Formalities: Art. 37 requires compliance with document/form standards.

  • Art. 38: Courts may suspend proceedings if a related foreign judgment is invoked.

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Chapter 8 > Grounds for refusal > When can a judgment be refused recognition under Art. 45(1)(b) Brussels Ibis?

Refusal applies if:

  1. Judgment was in default of appearance;

  2. Defendant was not properly served in time to defend;

  3. Defendant did not challenge the judgment when they could have.

→ Ensures the defendant’s right to be heard. Applies regardless of defendant’s domicile.

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Chapter 8 > Enforcement > How does the Brussels Ibis Regulation handle enforcement of Member State judgments?

  • Art. 39(1): A judgment enforceable in one Member State is automatically enforceable in others — no declaration of enforceability needed.

  • Goal: Facilitate EU-wide enforcement.

  • The defendant may apply to oppose enforcement based on grounds for refusal (e.g., Art. 45).

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Chapter 8 > Lugano Convention > What does the Lugano Convention regulate, and how does it compare to Brussels Ibis?

  • Multilateral treaty between EU, Norway, Iceland, Switzerland.

  • Covers jurisdiction, recognition, and enforcement in civil/commercial matters.

  • Mirrors the Brussels I Regulation (predecessor of Brussels Ibis).

  • Recognition: automatic, no special procedure.

  • Enforcement: requires a declaration of enforceability (exequatur) before measures can be taken.

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Chapter 8 > 2005 HccC > What is the 2005 Hague Choice of Court Convention and how does it apply?

  • Multilateral treaty in force in the EU (except Denmark), UK, Singapore, Mexico, Montenegro.

  • Applies to exclusive choice of court agreements in civil/commercial international cases.

  • Excludes consumer and employment contracts (Art. 2).

  • Art. 8: Judgements by chosen court must be recognized/enforced in other Contracting States.

  • Refusal only on limited grounds (e.g. invalid agreement).

  • Brussels Ibis prevails within the EU — Hague Convention applies mainly to third-state judgments.

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Chapter 8 > 2019 HccH Judgements Convention > What is the 2019 Hague Judgements Convention and what does it cover?

  • Multilateral treaty (Hague Conference on Private Int’l Law).

  • Entered into force for EU Member States (except Denmark & Ukraine) on 1 Sept 2023.

  • Covers recognition/enforcement of civil and commercial judgements, incl. consumer & employment cases.

  • A judgement is not eligible if it doesn’t meet any jurisdictional filters listed in the Convention.