Judgment with penalties? Beware!
As a lawyer, I conduct many summary proceedings, in which penalty payments often play an important rol, therefore: Judgment with penalties? Beware! Either the client wants to get something done at short notice, or is just facing an opposing party with demands.
The penalty payment is sometimes underestimated in the defence of summary proceedings / proceedings on the merits, and wrongly so. It often goes long on the substance, but short on the question of whether penalties should be imposed ánd when they would be forfeited.
Especially in summary proceedings, this comes up: as a defendant, a lawyer is not required (but highly recommended!), which is why, in the case of a judgment of condemnation with penalty payments, there is sometimes the thought that it will not be such a storm. But the reality is really different.
Penalty is incentive to take action (or not)!
The penalty payment is meant to give someone an incentive to do or not to do something, or just leave it. The amount of the penalty should therefore be somewhat proportional to the prohibition or injunction. Judges can reduce an (excessive) penalty on a claim. It is a misconception that a penalty is a kind of fine.
The case of Peter R. de Vries teaches that failing to comply with a judgment and (knowingly) forfeiting penalty payments is in itself also unlawful. A very recent ruling from 2019 confirms the Peter R. de Vries case: penalty payments are not a kind of commutation. So, if there is a guilty verdict in which a maximum of EUR 50,000 can be imposed in the event of non-compliance, paying EUR 50,000 does not mean that you no longer have to comply. Indeed, you can still start proceedings (and request a higher penalty payment!).
A ruling by the Den Bosch Court of Appeal shows once again how important it is to pay close attention when there is a judgment involving penalty payments.
Judgment with penalties? Beware!
It is clear from the judgment that the parties are involved in numerous different proceedings. The case involved a company engaged in the sale, repair and service of cleaning systems, in which there was a dispute between the company and the company’s director and shareholder, who at some point was dismissed as a director. That dismissal has apparently led to a multiplicity of proceedings, and this interim injunction concerned a judgment in which the director had claimed to see the financial statements including annual report and records for the period from 2012 to 2015. This was initially granted in proceedings, but no periodic penalty payments had been claimed. This is disappointing because you then depend on the good will of the other party. It is true that judgments must be complied with, but here there was no leverage to do so fully and on time.
This prompted the director to file summary proceedings, which resulted in a judgment with penalties. That judgment stated that within four weeks, the company must provide the annual accounts (including annual report and data) for the years 2012 to 2015 inclusive to the director, as well as all the notes of the shareholders’ meetings, and if the company fails to do so, to pay a penalty of EUR 2,500 for every day it does not comply, with a maximum of EUR 50,000. You guessed it: there will be whining about compliance with the judgment.
Who determines whether penalties have been forfeited?
The director had the judgment served, after which the company allowed the director to inspect records. Regarding the records, it was indicated that there would be no records. The director considered that the judgment had not been complied with and indicated that EUR50,000 in penalties had been forfeited. This also prompted the director to initiate the forced sale and that of the company’s (movable) property.
The company disagreed and initiated summary proceedings, stating that the director would no longer have an interest in the condemnation, as the director was no longer a shareholder. It was further indicated that the documents would no longer exist and that the judgment would be based on a mistake of fact and/or law and, finally, it was indicated that there was a permanent impossibility, whereby the penalties should be lifted.
Summary proceedings to stop the enforcement of penalties
That summary proceedings were lost by the company. On appeal, the issue is whether the court did the right thing. The court first addressed the interest of the director/shareholder. The starting point is that an enforcement can be suspended if the court considers that, in this case, the enforcer has no reasonably respectable interest in exercising his power of enforcement and thus collecting the penalty payments. It is established case law that a so-called enforcement judge has a limited duty. That is, the court is to judge whether enforcement is justified on the basis of the judgment.
The Court of Appeal finds that the penalty payments were indeed forfeited. Ignoring the contention that annual reports would be missing, the court is clear on this:
“The starting point is that the appellant was ordered to provide (access to) the annual reports on forfeiture of a penalty payment. The how and why of those annual reports is in principle irrelevant in these summary proceedings. The appellant has not complied with the order in the judgment of 20 November 2017 on this part, and the question is whether the appellant has made it plausible that there are reasons why it is nevertheless not obliged to pay the forfeited penalty payments. Such a reason also does not, in the Court’s view, lie in its inability to comply with the order. It has been argued by the appellant itself that it is fraudulent and against the law to draw up annual reports retrospectively, but this assertion alone has not made this argument plausible. The same applies to the appellant’s further submissions by deed dated 30 October 2018, which also address the rules surrounding the preparation of annual reports. Nor does the comment therein, which is not explained in any detail, that “the as-yet unfinished preparation of annual reports is contrary to law” provide sufficient grounds for assuming the impossibility of complying with the conviction.”
This thus goes rather far and it breaks down the company here that it did not provide all the annual reports. It is also somewhat clear from the judgment that the judges felt that not enough had been done to act in the spirit of the ruling. Too little, too late, you might say.
What could the company have done to avoid penalties?
The company could have gone to the interlocutory court earlier to indicate that the conviction was non-compliant, thus reducing the risk of forfeiting penalty payments. However, the company chose, and this is risky, not to submit all the reports, then the director indicated that penalties had been forfeited, after which the company had to start defending itself against this, and both Court and Court of Appeal do not go along with this.
What does this ruling teach about periodic penalty payments?
Periodic penalty payments are useful for a plaintiff, but dangerous for a defendant. In proceedings, it is very important as a plaintiff to properly formulate the request, the demand, and clearly state the reasons why periodic penalty payments are necessary. As a defendant, it is important to defend against penalty payments and also state precisely why any judgment would not be enforceable. Faced with a possible judgment, it is important to take action quickly, in close consultation with a lawyer specialising in penalty payments.
Judgment with penalties? Beware!
Should you have any questions about this blog, please do not hesitate to contact me, Jasper Hagers.