JUDGMENT OF THE COURT (Sixth Chamber)

16 December 1997(1)

(Company law — First Directive 68/151/EEC — Scope — Representation of acompany — Conflict of interests — Lack of authority of a director to enter into abinding transaction on behalf of the company)

In Case C-104/96,

REFERENCE to the Court under Article 177 of the EC Treaty by the Hoge Raadder Nederlanden for a preliminary ruling in the proceedings pending before thatcourt between

Coöperatieve Rabobank 'Vecht en Plassengebied‘ BA

and

Erik Aarnoud Minderhoud (receiver in bankruptcy of Mediasafe BV),

on the interpretation of Article 9(1) of the First Council Directive 68/151/EEC of9 March 1968 on co-ordination of safeguards which, for the protection of theinterests of members and others, are required by Member States of companieswithin the meaning of the second paragraph of Article 58 of the Treaty, with a viewto making such safeguards equivalent throughout the Community (OJ, EnglishSpecial Edition 1968 (I), p. 41),

THE COURT (Sixth Chamber),

composed of: H. Ragnemalm (Rapporteur), President of the Chamber,G.F. Mancini and P.J.G. Kapteyn, Judges,

Advocate General: A. La Pergola,

Registrar: L. Hewlett, Administrator,

after considering the written observations submitted on behalf of:

• Coöperatieve Rabobank 'Vecht en Plassengebied‘ BA, by J.C. van Ovenand A.P. Schoonbrood-Wessels, of the Hague Bar,

—    the Spanish Government, by R. Silva de Lapuerta, Abogado del Estado,acting as Agent,

• the Finnish Government, by H. Rotkirch, Head of the Legal Departmentin the Ministry of Foreign Affairs, acting as Agent,
  
  
• the Swedish Government, by L. Nordling, Rättschef in the Department ofForeign Trade of the Ministry of Foreign Affairs, acting as Agent, and
  
  
• the Commission of the European Communities, by A. Caeiro, LegalAdviser, and B.J. Drijber, of its Legal Department, acting as Agents,

having regard to the Report for the Hearing,

after hearing the oral observations of Coöperatieve Rabobank 'Vecht enPlassengebied‘ BA, represented by J.C. van Oven; of Mr Minderhoud, receiver inbankruptcy of Mediasafe BV, represented by J.J. Feenstra, of the Rotterdam Bar;of the Spanish Government, represented by R. Silva de Lapuerta; and of theCommission, represented by B.J. Drijber at the hearing on 8 January 1997,

after hearing the Opinion of the Advocate General at the sitting on 12 March 1997,gives the following

Judgment

1. By judgment of 22 March 1996, received at the Court on 1 April 1996, the HogeRaad der Nederlanden (Supreme Court of the Netherlands) referred threequestions to the Court for a preliminary ruling pursuant to Article 177 of the ECTreaty concerning the interpretation of Article 9(1) of the First Council Directive68/151/EEC of 9 March 1968 on co-ordination of safeguards which, for theprotection of the interests of members and others, are required by Member Statesof companies within the meaning of the second paragraph of Article 58 of theTreaty, with a view to making such safeguards equivalent throughout theCommunity (OJ, English Special Edition 1968 (I), p. 41, hereinafter 'the FirstDirective‘).
   
   
2. Those questions were raised in proceedings brought by the Coöperatieve Rabobank'Vecht en Plassengebied‘ BA (hereinafter 'Rabobank‘), financier of the holdingcompany Holland Data Groep BV (hereinafter 'HDG‘), of five of its operatingcompanies and of Mediasafe BV (hereinafter 'Mediasafe‘), against the receiver ofMediasafe on the subject of his challenge to the validity of an agreement to offsetdebit balances against credit balances, entered into between HDG, the fivecompanies and Mediasafe on the one hand, and Rabobank on the other.
   
   
3. It appears from the order for reference that on 23 October 1989 Rabobankconcluded an agreement with HDG and the five operating companies concerningthe calculation of interest on joint accounts and the offsetting of debit balancesagainst credit balances under which the companies were to be jointly and severallyliable to Rabobank.
   
   
4. On 21 November 1989, HDG and Stichting Nieuwegein (Nieuwegein Foundation)set up Mediasafe, in which HDG held 99 shares and Stichting Nieuwegein 1 share.HDG was appointed sole director and two commissioners were appointed, on aproposal from Stichting Nieuwegein, to oversee the management and the generalcourse of business of Mediasafe on behalf of Stichting Nieuwegein.
   
   
5. On 11 December 1989, Rabobank concluded another agreement concerning theoffsetting of debit balances against credit balances, the substance and scope ofwhich was the same as that of 23 October 1989. Mediasafe was represented byHDG, its sole director. Under that agreement all the companies in the HDG group,including Mediasafe, declared themselves jointly and severally liable for their debtsto Rabobank.
   
   
   
   
6. On 22 May 1990, Mediasafe was declared bankrupt. Mr Minderhoud was appointedreceiver of the company. At the time Mediasafe's account with Rabobank showeda credit balance of HFL 447 117.60.
   
   
7. By letter of 5 June 1990, Rabobank informed the receiver that, in accordance withthe agreement of 11 December 1989 and Article 53 of the Faillessementswet(Bankruptcy Law), it proposed to offset credit balances against debit balances ofthe current accounts of the other companies in HDG in respect of which Mediasafewas joint and several co-debtor. Rabobank stated that, once the balances had beenoffset in this way, Mediasafe's credit balance with Rabobank at the date of thebankruptcy stood at HFL 67 337.36.
   
   
8. By judgment of 31 July 1990, HDG and its five other operating companies weredeclared bankrupt.
   
   
9. The receiver sought payment from Rabobank of the difference betweenMediasafe's credit balance before and after this offsetting operation, whichamounted to HFL 379 780.24. He argued that the agreement to offset balances of11 December 1989 could not be given effect because there was a conflict ofinterests within the meaning of Articles 12(3) and (4) of Mediasafe's statutes andArticle 2:256 of the Netherlands Civil Code between Mediasafe and HDG — whichconcluded the agreements, inter alia, on behalf of Mediasafe in its capacity as soledirector. Consequently, HDG had no authority to represent Mediasafe when theagreement was concluded.
   
   
10. Article 2:146 of the Netherlands Civil Code, which applies to 'naamlozevennootschappen‘ (public limited liability companies), and Article 2:256, whichapplies to 'besloten vennootschappen met beperkte aansprakelijkheid‘ (privatelimited liability companies), provide that where there is a conflict of interestsbetween a company and the directors authorized to represent it when a legalinstrument is being concluded, that instrument can only be concluded by thecommissioners of that company.
    
    
11. That statutory provision was also incorporated in Article 12(3) and (4) ofMediasafe's statutes, under which:
    
    '3.    In the event of a conflict of interests between the company and one or moreof its directors, the remaining director(s) shall be empowered to bind thecompany.
    
    4.    If there is only one director or if there is a conflict of interest involving allits directors, the company shall be represented by the board ofcommissioners.‘
    
    
12. By judgment of 4 August 1993, the Arrondissementsrechtbank (District Court),Utrecht, held that, by reason of a conflict of interests within the meaning of Article2:256 of the Civil Code, HDG had no authority to conclude, on behalf ofMediasafe, the agreement to offset balances with Rabobank and took the view thatthe latter, as a professional organization, had constructive notice of that conflict ofinterest. The Arrondissementsrechtbank accordingly upheld the receiver's claim.
    
    
13. That judgment was upheld by the Gerechtshof (Regional Court of Appeal),Amsterdam, on the same grounds.
    
    
14. Before the Hoge Raad der Nederlanden, Rabobank argued that a conflict ofinterests within the meaning of Article 2:256 of the Civil Code could only exist inthe case of an instrument concluded between a company and its director. The HogeRaad rejected that argument, thus recognizing the applicability of that provision tosituations in which there was an indirect conflict of interests. However, it questionswhether for a company to rely on Article 2:256 of the Civil Code as against a thirdparty might not be incompatible with Article 9 of the First Directive, under which:
    
    '1.    Acts done by the organs of the company shall be binding upon it even ifthose acts are not within the objects of the company, unless such acts exceed thepowers that the law confers or allows to be conferred on those organs.
    
    However, Member States may provide that the company shall not be bound wheresuch acts are outside the objects of the company, if it proves that the third partyknew that the act was outside those objects or could not in view of thecircumstances have been unaware of it; disclosure of the statutes shall not of itselfbe sufficient proof thereof.
    
    2.    The limits on the powers of the organs of the company, arising under thestatutes or from a decision of the competent organs, may never be relied on asagainst third parties, even if they have been disclosed.
    
    3.    If the national law provides that authority to represent a company may, inderogation from the legal rules governing the subject, be conferred by the statuteson a single person or on several persons acting jointly, that law may provide thatsuch a provision in the statutes may be relied on as against third parties oncondition that it relates to the general power of representation; the questionwhether such a provision in the statutes can be relied on as against third partiesshall be governed by article 3.‘
    
    
15. Taking the view that Article 2:256 of the Civil Code should be interpreted in thelight of the provisions of the First Directive, the Hoge Raad der Nederlandenreferred the following questions to the Court for a preliminary ruling:
    
    '(1)    Is it consistent with the First Directive for a company to be allowed to rely,as against a third party with whom a director generally authorized torepresent the company has entered into a transaction on its behalf, on thefact that the director lacked authority on the ground that the transactioninvolved a conflict of interests between him and the company?
    
    (2)    Is Question 1 to be answered in the affirmative only if the third party hadknowledge of the conflict of interests at the time when the transaction tookplace, or could reasonably have been expected to have knowledge of thatconflict of interests on the basis of the information available to him at thetime?
    
    (3)    Is Question 1 to be answered in the affirmative only if the conflict ofinterests at the time when the transaction took place was so plain that noreasonable third party could have believed that no such conflict existed?‘
    
    
16. Mr Minderhoud and the Swedish Government argue that Community law is notapplicable to the situation described in the question put by the Hoge Raad derNederlanden and that neither Article 9 nor any other provision of the FirstDirective concerns the question whether a company may be bound in the event ofbreach of a rule, such as that applicable in the main proceedings, limiting authorityto enter into binding obligations.
    
    
17. Rabobank, the Spanish Government and the Commission consider that Article 9(1)of the First Directive prevents a company from relying, as against a third party withwhom the director has concluded a legal instrument which binds the company onthe fact that the director lacked authority because he had an interest whichconflicted with that of the company, where that lack of authority was not the resultof a mandatory legal provision. In that respect, they claim, it is of no relevancewhether the third party was aware of the conflict of interests or whether theexistence of that conflict of interest was obvious.
    
    
18. The Finnish Government and, in an alternative submission, the SwedishGovernment consider that the First Directive does not preclude a nationalprovision to the effect that a company can plead nullity on the basis of a conflictof interests if the third party was aware or could not have been unaware of theexistence of a conflict of interests. A fair balance could thus be maintained betweenthe certainty of commercial transactions, on the one hand, and the need to protectthe company, on the other.
    
    
19. The purpose of the First Directive, it must be noted, is to coordinate the safeguardsrequired by Member States of the types of limited liability company listed in Article1, for the purpose of protecting the interests of, inter alia, third parties.
    
    
20. To that end, Section II of the First Directive lays down provisions which restrict tothe greatest possible extent the grounds on which obligations entered into in thename of the company are not valid, as is clear from the fifth recital in thepreamble.
    
    
21. The first paragraph of Article 9(1) of the First Directive provides that acts doneby the organs of the company are to be binding upon it even if those acts are notwithin the objects of the company, unless such acts exceed the powers that the lawconfers or allows to be conferred on those organs.
    
    
22. However, it is clear from both the wording and the subject-matter of that articlethat it concerns the limits on a company's powers as allocated by law to the variousorgans of the company and is not intended to coordinate the national lawsapplicable where a member of an organ finds himself in a conflict of interests withthe company represented because of his personal circumstances.
    
    
23. Moreover, the rules governing enforceability to be derived from this provisionrelate to the powers which the law, to which third parties can refer, grants or allowsto be granted to the company organ, and not to the question whether a third partywas aware of a conflict of interests or could not have been unaware of it in thecircumstances of the case.
    
    
24. It follows that the rules governing the enforceability as against third parties of actsdone by members of company organs in such situations fall outside the normativeframework of the First Directive and are matters for the national legislature.
    
    
25. This conclusion is, moreover, confirmed by the proposal for a Fifth Directive tocoordinate the safeguards which, for the protection of the interests of members andothers, are required by Member States of companies within the meaning of thesecond paragraph of Article 58 of the EEC Treaty, as regards the structure ofsociétés anonymes and the powers and obligations of their organs (Journal Officiel1972 C 131, p. 49; OJ 1983 C 240, p. 2).
    
    
26. Article 10(1) of that proposal for a Fifth Directive provided that every agreementto which the company was party and in which a member of the management organor of the supervisory organ, was to have an interest, even if only indirect, must beauthorized by the supervisory organ at least.
    
    
27. Article 10(4) of the proposal for a Fifth Directive provided, further:
    
    'Want of authorization by the supervisory organ or irregularity in the decisiongiving authorization shall not be adduced as against third parties save where thecompany proves that the third party was aware of the want of authorization or ofthe irregularity in the decision, or that in view of the circumstances he could nothave been unaware thereof.‘
    
    
28. Accordingly the answer to the question referred to the Court must be that the rulesgoverning the enforceability as against third parties of acts done by members ofcompany organs in circumstances where there is a conflict of interests with thecompany fall outside the normative framework of the First Directive and arematters for the national legislature.
    
    Costs
    
    
29. The costs incurred by the Spanish, Finnish and Swedish Governments and by theCommission of the European Communities, which have submitted observations tothe Court, are not recoverable. Since these proceedings are, for the parties to themain proceedings, a step in the action pending before the national court, thedecision on costs is a matter for that court.
    
    On those grounds,

    THE COURT (Sixth Chamber),

    in answer to the questions referred to it by the Hoge Raad der Nederlanden byjudgment of 22 March 1996, hereby rules:
    
    
    
    The rules governing the enforceability as against third parties of acts done bymembers of company organs in circumstances where there is a conflict of interestswith the company fall outside the normative framework of the First CouncilDirective 68/151/EEC of 9 March 1968 on co-ordination of safeguards which, forthe protection of the interests of members and others, are required by MemberStates of companies within the meaning of the second paragraph of Article 58 ofthe Treaty, with a view to making such safeguards equivalent throughout theCommunity, and are matters for the national legislature
    
    
    

RagnemalmMancini Kapteyn

Delivered in open court in Luxembourg on 16 December 1997.

R. Grass

H. Ragnemalm

Registrar

President of the Sixth Chamber

1: Language of the case: Dutch.