INQUIRY PROCEDURE IN CURACAO

Important court decision for the local trust practice

On 30 March 2012 the first petition for an inquiry procedure under the new law was dealt with by the Joint Court of Justice of Aruba, Curacao and St. Maarten, and of Bonaire, St. Eustatius and Saba. Karel Frielink and Dinesh Mishre of Spigthoff had the honor of acting as lawyers for the defense … and with success! This decision is very important for the companies in Curacao and especially for the local trust offices.

As of 1 January 2012 the amended Corporate Code (Book 2 Civil Code) of Curacao entered into force. The new legislation introduces a so-called inquiry procedure for, amongst others, limited liability companies and foundations. The inquiry procedure (a.k.a. investigation proceedings) can result in a court order for an investigation into the affairs of a corporation.

Shareholders of limited liability companies may file a petition with the Joint Court if they hold at least 10% of the equity and/or voting rights. As far as foundations are concerned, any person with a special interest can file a petition, if prior to the petition, an enterprise has belonged to the foundation. There has been some uncertainty as to what a ‘foundation to which an enterprise has belonged’ means. An enterprise is, in short, ‘an organization of labor and equity with the aim to make profit’.

In this matter, the plaintiff, a financier of a Curacao (limited liability) company, requested financial information regarding said company from the defendant, a foundation that held all shares in the company for administrative purposes. The plaintiff was of the opinion that as that the foundation (the sole shareholder) and the company were managed by the same trust company, the shareholder in fact managed the company and should provide the requested information.

The foundation had denied the request and defended itself in court stating that a financier was not an interested party that could request inquiry proceedings and even if it was entitled to such request, there were no valid legal grounds for the court to allow an investigation into the foundation. The foundation was merely an administrative body holding the shares for which certificates had been issued and it did not determine or interfere with the business of the company.

Interestingly, the case was initiated under the old Book 2 Civil Code in October 2011 and the Court of First Instance of Curacao denied the requests of the plaintiff for an investigation in its decision of 15 December 2011. In appeal the Joint Court determined that considering the fact that the new inquiry procedure legislation was effective as of 1 January 2012, the case would be treated as (1) an appeal of the initial procedure and (2) a new request under the new legislation.

In its (appeal) decision of 17 April 2012 the Joint Court determined that under the new law on inquiry proceedings, no petition can be filed for an investigation at a foundation to which no enterprise has belonged for a period of three years prior to filing the petition. According to the Joint Court this means that the foundation needed to have conducted economic activity with the aim to make profit. This was not the case. The Joint Court considered that the aim to make profit by the trust company (the manager of the foundation) could not be attributed to the foundation. Furthermore, the fact that the foundation collects dividends was not an aspect of making profit, as the foundation collects the dividends for the holder of certificates and the dividends are not part of the equity of the foundation. For these reasons, the request of the plaintiff under the new legislation was inadmissible.

In the appeal procedure under the old legislation, the Joint Court denied the request of the plaintiff for the following interesting reasons. The Joint Court considered that the mere fact that the managing director of the foundation was also the managing director of the operating company, did not mean that the foundation was in fact the managing director of the operating company or that it determined the strategic policy of the company. Further that the separate legal entities, the foundation and the limited liability company, could not be equated (vereenzelvigd) with each other solely for that reason. Furthermore, the fact that the foundation had certain voting/approval rights as a shareholder and access to certain documentation in that capacity did not make any difference.

Many company structures are so-called holding structures whereby a holding company or foundation holds all shares in the (operating) company. Often these holding companies/ foundations are managed by local trust companies. For foundations the decision means that if a foundation does not conduct economic activity with the aim to make profit, an investigation may not be requested.

For holding companies the appeal decision means that the mere fact that the holding company holds all shares in a subsidiary and both companies have the same managing director, this does not mean that the holding company determines the (strategic) policy of the subsidiary. Therefore, as long as the holding company acts in its capacity as shareholder, the Joint Court is of the opinion that no investigation may be held at the holding company.

In the years to come the Joint Court will deal with many corporate governance issues and will play an important role in the resolution of various disputes concerning corporations. The Joint Court will become the forum of choice for litigating shareholders’ disputes, mismanagement matters, disputes between (managing and supervisory) directors and contests for corporate control.

Karel Frielink / Dinesh Mishre
Attorneys (Lawyers)

(2 May 2012)
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