The relevance of rules constraining or enjoining distributions in organizational law

Donner et retenir ne vaut: a rule protecting personal creditors

In the French-Belgian legal tradition the technique of the legal person was restricted during the 19th century to entities with a ‘for profit’ nature, i.e. entities geared towards the distribution of the profits towards members. The distrust of non-profit entities should partially be understood as a legacy of the French Revolution and the cultural, political and social struggles of the 19th century (a distrust of intermediary bodies, a hostile attitude towards religious organizations, guilds and trade unions;) (J. Vananroye, Morele wezens en wetsontduikende monniken, opening address at the Belgian Supreme Court on the occasion of the opening of the judicial year 2012, Antwerp, Intersentia, 2012, 2, nr. 2).

A present-day justification of a positive bias towards ‘for profit’ entities would be this: the legal obligation to distribute any profits causes the shares of the shareholders to be a valuable bundle of rights; this makes the shares into an economically valuable asset which can be seized by the personal creditors of the shareholders; and this in turn mitigates the harmful effects of asset partitioning for these personal creditors.

The contemporaneous Belgian approach to non-profits allows them to organize themselves with asset partitioning. The membership rights are not transferable and cannot be seized.

We see the justification for this as follows: the legal system recognizes that there are non-profit goals which justify asset partitioning, even if this results in the absence of a transferable bundle of rights which could be seized. The rules on non-profits impose the not-for-profit nature of the entity through the prohibition of any direct distributions or indirect value transfers towards the members or the decision makers.

The justification is this: asset partitioning which does not result in assets which serve as collateral for members’ creditors is permitted provided the members do not benefit indirectly from the assets of the entity. Members can opt for entity shielding without shares as long as they do not replicate the cash rights of shareholders. A similar idea can be read in the French legal expression: Donner et retenir ne vaut (it is not allowed to give and to withhold at the same time). Charity is fine, but when the benefactor retains the perks of ownership, there is a suspicion that the gift is set up to harm the interests of the personal creditors of the benefactor. (See for ‘sham foundations’ here – in Dutch.

Hansmann, Kraakman and Squire have identified the costs that entity shielding imposes on the shareholders’ personal creditors as the next chapter in the evolution of legal entities (H. HANSMANN, R. KRAAKMAN & R. SQUIRE, “Law and the Rise of the Firm”, Harv.L.Rev. 2005-06, (1335) 1399-1403.). We submit that the position of personal creditors sheds also light on the traditional distinction between for-profit and non-profit legal entities.

Joeri Vananroye

Asset partitioning (limited liability and entity shielding) is the subject of the annual meeting of the Netherlands Association for Comparative and International Insolvency Law on 15 November 2018 in Amsterdam. The topic is:  Limits to Group Structures and Asset Partitioning in Insolvency. Contributors are prof. R. Squire (Fordham University, New York), prof. J. Vananroye (University Leuven), A. van Hoe (University Antwerpen), Dr. Gillis Lindemans (University Leuven), prof. F.M.J. Verstijlen and A. Karapetian (University Groningen) and A.L. Jonkers Univer(sity of Amsterdam).

Author: Joeri Vananroye

Professor of economic analysis of law (KU Leuven), attorney (Quinz)

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