The 403-statement explained in more detail (I)

Many companies operate with a 403-statement. It is a practical and simple solution. But not every company knows exactly how such statement actually works. What positive or negative consequences there might be. In this article we provide you with a brief insight on what can go wrong.

Ratio
Article 403 of Book 2 of the Dutch Civil Code (DCC) stipulates if and when a legal entity, that is part of a group of companies, is exempted from the requirements set by law for preparing annual accounts.

One of the conditions is that shareholder(s) of the exempted company have consented to the deviation from the requirements pertaining the annual accounts, which consent must be given after the start of the financial year and before the adoption of the annual accounts (the so-called “declaration of consent”). Another condition is that every shareholder deposits a written statement with the trade register of the (Dutch) Chamber of Commerce, in which it declares to be jointly and severally liable for the debts of the exempt legal entity (subsidiary). This declaration is normally referred to as “the 403-statement.” Please, note that the aforementioned declaration of consent must also be filed with the Chamber of Commerce (Article 2:403 BW paragraph 1 sub b).

The rationale behind the 403-statement is that creditors of subsidiaries exempted in this way are compensated for the fact that they do not have financial statements at their disposal showing the financial position of the subsidiaries concerned. The risk that the creditor may run as a result is made up for by the joint and several liability of the parent company.

How does this work? An example.
A manufacturer of heavy machinery (“X BV”) builds a new factory. The contractor makes a claim (dated on or about October 2016) against X BV under the construction contract. X BV refuses to pay. The contractor takes the position that X BV’s shareholder, Y BV, is jointly and severally liable for this claim because of a 403-statement issued by Y BV. The contractor now wants Y BV to settle the claim.

The fact is that in May 2016, Y BV consented in writing to the consolidation of the financial statements for the 2015 financial year. The text of the statement of consent showed that the consolidated financial statements for the 2015 fiscal year had already been filed with the Chamber of Commerce at that time. Therefore, the requirement of article 2:403 paragraph 1 sub b DCC, which stipulates that the consent of the shareholders must have taken place after the start of the (relevant) financial year but before adoption of the financial statements, was not met.

The declaration of consent for the 2015 financial year was filed with the Chamber of Commerce on July 11, 2016. However, the 403-statement itself (or, the declaration of liability) for the year 2015 had not been filed. In 2016, a liability statement was filed for the year 2016 and with the effective date of May 21, 2016, but a filed consent statement for that year was missing.

What does this mean?
This means that Y BV did not meet the requirements of Article 2:403 DCC neither in 2015 or in 2016. X BV was therefore not exempted from the requirements for preparing its own annual accounts.

Can the contractor who has a claim against X BV from on or about October 2016 successfully address Y BV, despite the fact that the legal requirements of the 403-statement were not met? The answer is yes. While consolidation was not legally allowed, a creditor can still invoke the liability statement contained in the 403-statement filed with the Chamber of Commerce.

And what about X BV?
It does not end there for X and Y BV. By consolidating without having met the legal requirements, the so-called “administration duty” (administratieplicht)  contained in article 2:10 DCC has not been met either as X BV is now not exempted from the obligation to self-publish its annual accounts. Should X BV subsequently go bankrupt, there is a risk that the directors of X BV will be held liable for the bankruptcy deficit.

Advice
Our advice to the consolidating company: always asses whether you are in alignment with all applicable legal requirements. Not only regarding the filing of the 403-statement, but also when it regards the acual wording thereof. The wording determines the scope of the liability and can greatly affect the position of the companies involved. More on this in a subsequent blog.

Our advice to creditors: always check in advance whether a 403-statement has been issued and, if so, what the scope is. In the case mentioned above, it worked out well for the creditor, but if the content of the statements had contained certain restrictions, there could have been a very different outcome.

In summary
Don’t take the 403-statement lightly. Engage with a legal specialist before you decide on working with a 403-statement and if your company is already using such statement, it is advisable to have it checked from time to time.

More on the content of the 403-statement

Questions?
Would you like to have more information about the 403-statement? Then please contact us. We’re happy to assist you.

Please know that, because of the Brexit, the United Kingdom is no longer bound by European directives and regulations since the 1^st of January 2021. Hence, UK legal entities are therefore no longer able to benefit from the annual accounts’ exemption.