Was a loan taken out privately or as the representative of a company in formation? Dutch Corporate Law Lawyer explains

In the Netherlands, it is possible to act on behalf of an entity, such as a private limited liability company or public limited liability company, if it has not yet been incorporated. However, this must be obvious to third parties, and the company in formation must be acting under the name ‘[name] BV i.o.’ or ‘[name] NV i.o.’ (i.o. means “in formation”). In this case, the appeal included the question of whether a representative had acted in his private capacity or on behalf of the company in formation. Dutch Corporate Law Lawyer Marco Guit explains.

Private capacity or as the representative of a company in formation?

On appeal, the question arose as to whether the founder of a company had entered into the €60,000 loan agreement The agreement that one party allows a third party to use an item without financial consideration under the condition that that party will return the item.
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loan agreement
in a private capacity or as the representative of his company in formation. In first instance, the court had ruled that the loan had been taken out in a private capacity and should therefore also be repaid privately by the borrower.

Loan agreement

To answer the question of whether and in what capacity the loan agreement had been entered into, the Court of Appeal applied two judgments of the Dutch Supreme Court (SC judgment of 11 March 1977 (Kribbebijter) and SC judgment of 28 November 2014). In these judgments, the Supreme Court stated that it concerned the question of what the parties had declared towards each other and what they had and could have mutually derived from each other’s declarations and conduct.

Acting on a company’s behalf?

The Dutch Court of Appeal assessed the facts in this matter on the basis of the above criteria. The facts showed that in the loan agreement the borrower was not referred to as a representative acting on behalf of a company in formation but as a private person without reference to the company. The signature on the final page of the agreement did not mention the company either.

Deed of incorporation: private deposit

In addition, the ‘considerations’, also called ‘recitals’, did not mention that the loan should be regarded as a loan for a company. The company’s deed of incorporation showed that both founders had contributed €60,000. The Court of Appeal concluded from this that the founder had made a private capital contribution of €60,000. The fact that this capital contribution resulted from a loan does not mean it was a loan taken out by the company in formation.

Loan to set up a company

On the basis of the above, the Court of Appeal therefore upheld the judgment in first instance and found that the loan had been taken out in a private capacity. The fact that the loan was ultimately used to make a payment of €60,000 for the incorporation of the company does not mean that the loan then became a loan taken out by that company in formation.

Lawyer for the incorporation of a company in formation in the Netherlands

The above judgment shows, on the one hand, that an entity in formation can start doing business even before the actual entity has been formed. This judgment also shows the downside in that the actions must be well and adequately documented so that the founder cannot be held ultimately liable in a private capacity. A lawyer can assist in this.