Letter from Minister Dekker concerning abuse of turbo liquidation

This blog also mentioned the possibility that the bankruptcy of an already dissolved company can be applied for, if it was afterwards confirmed that, at the time of the dissolution of the company, assets could still be divided.

That the doctrine of turbo liquidation and its misuse is currently in the spotlight is clear from the letter from Parliament of 7 October 2019 by Sander Dekker, the Minister for Legal Protection. What are dissolution and turbo-liquidation and which measures does Minister Dekker want to take? These questions will be discussed below.

What is dissolution?

If a company is no longer profitable, or in the context of a reorganisation, the director of the company can decide to liquidate the company. This requires a shareholders’ resolution to dissolve the company. Subsequently, a liquidator is appointed who settles the current affairs, realises all the assets of the company with the aim of distributing the proceeds to the creditors and – if money is left – to the shareholders.

The law sets formal requirements for the liquidation, such as the liquidator’s registration in the trade register (article 2:23 of the Dutch Civil Code), the depositing of the distribution list and the settlement of the liquidator’s account and accountability. Only after completion of the liquidation will the legal person cease to exist.

The law also provides for the possibility of a “quick” dissolution, i.e. a dissolution without formal settlement phase. The option is also called turbo liquidation.

What is turbo liquidation?

If a company has no assets, liquidation may not be required. After all, there is nothing to settle. With a shareholders’ resolution to dissolve the company, it immediately ceases to exist. There will be no liquidator, no bankruptcy and no liquidator. Such a turbo liquidation is also possible if there are no assets, but unpaid debts are still outstanding.

Are there risks associated with turbo liquidation?

In general, the potential risks of abuse of legal persons cannot be ruled out in advance. For creditors, in an individual case it will mainly be about whether there were benefits at the time of the dissolution, and whether redress is still possible. A disadvantage can arise if it appears that income has been withheld, assets have been withdrawn from the estate prior to the turbo liquidation, or if selective payment to creditors took place.

It also follows from case law that applying turbo liquidation can, under certain circumstances, lead to the personal liability of directors if they have acted unlawfully towards the creditors of the dissolved company. For example, turbo liquidation with concealment of benefits results in unlawful acts on the part of the director. See, for example, a ruling by the Court of The Hague of 1 May 2019, in which it is stated briefly that a director who is also a shareholder with full control may be expected to make the benefits transparent.

What measures will Minister Dekker take?

Minister Dekker proposes a number of specific measures in the letter to prevent abuse. For example, the board will have to take care of the general announcement of the intended dissolution without liquidation. In this context, the board must publish a final balance sheet, a management statement and financial statements. Also, prior to the deletion of the legal entity in the trade register, the annual accounts for all previous financial years must have been made public, unless an exemption based on article 2: 394 paragraph 5 of the Dutch Civil Code applies.

By giving creditors access to this up-to-date information, the minister wants to guarantee that creditors can take note of a turbo liquidation. They can then make a decision to request the court to reopen the turbo liquidation based on Article 2: 23c of the Dutch Civil Code.

Concluding remarks

The letter to the House of Representatives only outlines the first rough contours of the forthcoming legislative amendment. Minister Dekker will present a draft bill for the amendment of the law in 2020 and will present this bill for consultation. We will keep you informed of these and other developments.

The lawyers of our Company and Insolvency department have extensive experience in the field of corporate and insolvency law and regularly advise on the dissolution of legal persons, as well as directors’ and officers’ liability issues in the event of misuse of liquidation and (alleged) wrongful conduct of directors towards creditors.

Would you like to know more about these topics? Please contact us.