What does this mean for legal entities and its directors?
The Book 2 on the Law of Legal Entities which was introduced and will become effective at a date which has not yet been determined, introduces several new matters which were previously not arranged in the law. This will have an immediate effect on legal entities and its Directors. In this article we will discuss some of these topics with a focus on changes impacting the financial reporting requirements of Legal entities.
What are the main Changes?
• Introduction of a ranking in the documents/ agreements which govern the legal entity.
• Introduction of Director’s liability.
• Defining of criteria based on which the organization is classified as a large organization.
• The introduction of additional legal requirements for organizations which classify as being large.
• The experts which can be hired to issue the required report.
June 5, 2019, was the date when the ‘National Ordinance to Amend the Civil Code of Aruba by Introducing a Book 2 on the Law of Legal Entities’ was signed (hereafter referred to as “Book 2”). With the achievement of this milestone a much-needed update has been achieved of laws which define legal entities. With this step Aruba follows in the footsteps of Curacao and Sint Maarten which achieved this modernization in January 2012 and 2014 respectively. The final provision states that this national ordinance will enter into force at a time to be determined by national decree. This national decree has not yet been issued.
Until the introduction of Book 2 of the Civil Code of Aruba legal entities were governed by laws issued in several State Ordinances, some of which were very out of date. Therefore, it was desirable in this context to radically modernize the law of legal entities. In addition, by taking this step Aruba has achieved clarity of the law and concordance with the other countries of the Kingdom by placing these laws in a separate book of the Civil Code of Aruba.
The law is applicable to the following legal entities: the Foundation (“Stichting”), the Association (“Vereniging”), the Cooperative and the Mutual Insurance Company (“Coöperatie en onderlinge waarborgmaatschappij”), the Corporation (“Naamloze Vennootschap”) and the Limited Liability Company (“de Vennootschap met Beperkte Aansprakelijkheid”).
Introduction of a ranking in the Documents/ Agreements which govern the legal Entity
Book 2 introduces a ranking which applies between the different documents and arrangements that govern the Legal entity. The basic principle that remains is that the provisions of Book 2 rank at the top. This is followed by the articles of association (“Statuten”), Company agreements and as last in the ranking Company rules (“Reglement”). It should be noted that provisions of a lower regulation are void insofar as they are contrary to a higher regulation. As a result Legal entities could be confronted with instances where that their current arrangements and regulations are void.
In case of bankruptcy of the Legal entity, every Director is fully liable for any deficit between the available assets and liabilities to be settled. There are possibilities for exculpation from director’s liabilities for a director who can prove that, taking into account the duties assigned to him and his term of office, he cannot be seriously blamed for non-compliance with the obligations in question, and has not been negligent in taking measures seeking better compliance.
Defining of Criteria based on which the Organization is classified as a large Organization
With the introduction of Book 2 three criteria have been introduced. If an organization meets all three of these criteria in two consecutive years, then these organizations are classified as large organizations and additional legal requirements apply to them. The criteria and additional legal requirements do not apply to Limited liability companies or the Foundation and Association which does not perform activities based on which they are considered to be a company in line with the definition of the trade register regulation (“Handelsregisterverordening”).
These are the criteria:
1) At some point during the financial year the company employed more than 20 people. No distinction is made whether these employees are employed directly (on the payroll of the company), through other group companies or through an employment agency.
2) The value of the assets based on a balance sheet prepared based on acceptable financial reporting standards (further described below) exceeds Afl. 5,000,000 (or equivalent balance in foreign currency).
3) The net turnover for the financial year, calculated based on acceptable financial reporting standards exceeds Afl. 10,000,000.
What are the additional legal requirements applicable to these organizations?
1) The period for the preparation of the financial statements is shorter (6 months instead of 8 months). In exceptional circumstances this period can be extended with 6 months through an approval of the shareholders meeting.
2) These organizations also need to prepare a Directors’ report (“bestuursverslag”). The Directors’ report gives a faithful representation of the course of events of the organization and consolidated subsidiaries during the financial year.
3) The financial statements need to be accompanied by a report issued by an expert (further described below).
4) The financial statement needs to be prepared based on the financial reporting standards as issued by the International Accounting Standards Board (IASB) or the International Public Sector Accounting Standards Board. Alternatively, they can be prepared based on a comparable financial reporting standard applicable in a certain jurisdiction issued by an authorized or recognized standard setting organization. It is recommendable for the Directors to assess how the Legal entity is impacted and take timely action to ensure compliance with the above mentions additional legal requirements. Non-compliance with these legal requirements also could result in Director liability.
Which experts can be hired to issue the required report?
The external expert who is hired, needs to be accredited to issue the required report. The following governing bodies are authorized to hire the external expert: the shareholder(s) unless the authority lies with the Supervisory Board (“Raad van Commissarissen”). If there is no Supervisory board or the Supervisory Board defaults in exercising this responsibility, then the Directors are authorized to hire the expert.
The expert will be charged with examining whether the financial statements and the directors’ report meet the requirement of the law and will issue a written report regarding the reliability of the financial statements and their findings. A natural person who is accredited by the Dutch Professional Association of Accountants (“Nederlandse Beroepsorganisatie van Accountants”) is authorized to issue the report. Alternatively, a natural person who is accredited by a comparable organization as the Dutch Professional Association of Accountants and is therefore subject to a comparable behavioral, professional and disciplinary framework.
As soon as the ‘National Ordinance to Amend the Civil Code of Aruba Introducing Book 2 on the Law of Legal Entities’ enter into force Legal entities and its Directors need to comply with the law.
Therefore, it is recommendable that a timely assessment is done on the assess the current compliance of the legal entity with the requirements of the Law.
By doing this any possible instances of future non-compliance can be identified early and appropriate measures can be taken.