Creativity has its (legal) boundaries

11 May 2020

In practice we notice that in this uncertain period entrepreneurs are creatively busy to keep the company running. For example, by developing additional activities. As long as they remain in line with the main object of the company, there is not much going on, but check your articles of association to be sure!
In practice we notice that in this uncertain period entrepreneurs are creatively busy to keep the company running. In addition to the usual activities, there are now, for example, activities in which there is no or as little contact with customers as possible, such as restaurants that now offer their meals as a take away. Such an adapted form of activity will not easily lead to a discussion as to whether or not this fits within the object of the legal entity. However, if the same restaurant decides to sell bicycles, we are dealing with the legal doctrine of exceeding the object of the legal entity. This can lead to the reversal of transactions and consequential damages.

The description of the object of the legal entity
As included in Article 2:177 of the Dutch Civil Code, the object of the legal entity is included in the articles of association (in case of a private company). The object of the legal entity determines the limits of its activities. Among other things, the formulation of the object of the legal entity may indicate whether or not a legal act falls within the scope of the object; the actual activities of the company must fit into the textual description of the legal entity as set out in the articles of association.

Consequences of exceeding the object of the legal entity
If a legal entity carries out activities which are not mentioned in the articles of association, this may lead to the voidability of the legal act in question. After nullification of the legal act, the transaction may be reversed and the damages suffered by the legal entity may be recovered from its board members or from third parties who know or should have known that this legal act was not among the usual activities of the legal entity.

Only the legal entity itself can rely upon exceeding the object of the legal entity.

An example:
When an ICT consultancy company also starts selling facemasks and these turn out to be faulty, causing damage to the company, the company (often also a trustee on behalf of the company) can hold the board, or the third party (for example the buyer) who knew or should have known that this activity does not belong to the company, liable for the damage suffered by the company.

The consequences of exceeding the object of the legal entity can therefore be significant for you as a board member of the legal entity.

In short, dealing creatively with changing main activities due to circumstances is possible and will not easily lead to problems, as long as it remains in contact with the main object of the legal entity.

Advice
In any case, we advise entrepreneurs to carefully study the articles of association before expanding their activities and, if necessary, to make the articles of association more appropriate to the activities.