The most difficult period for directors

Options

Naturally, the first priority is restoring the company to health. Sufficient liquidity is key. You will need to assess whether you can inject enough capital yourself or secure financing to resolve the liquidity issues.

You might consider offering a private settlement to your creditors. If you meet certain conditions, you may also enforce this through a so-called WHOA procedure. WHOA stands for “Wet Homologatie Onderhands Akkoord” (Court Approval of Private Agreements Act). This blog provides further insight into such a procedure. Whether or not you use WHOA, you as a director must ensure that fresh capital is brought into the business to pay (a percentage of) outstanding claims. You will also need projections demonstrating the company’s ability to survive.

To avoid bankruptcy, you may apply to the court for a suspension of payments. An administrator is then appointed to assess—based on your input—whether the business is viable. During this period, you are not required to pay creditors (payment is deferred), giving you time to reorganise. Within this period, it is possible to negotiate a payment arrangement, a settlement, or a restart.

If it becomes clear that sufficient liquidity cannot be obtained in the short term, and none of the above options are viable, your company is in a state of insolvency. It may be declared bankrupt. In this situation you will lose control of the business, a trustee is appointed, and the company’s assets will be wound up.

Informing stakeholders

Every company has various stakeholders: creditors, customers/debtors, the tax authority, lenders, etc.

If you are considering one or more of the above options, you must also be aware that, as a director, you owe various duties to these stakeholders. Below are some key considerations:

Creditors

If bankruptcy is unavoidable or highly likely, you can no longer choose which creditors to pay. You must ask yourself whether any creditors have priority rights. Unsecured creditors must be treated equally. Failure to do so could lead to personal liability.

Customers/debtors

Conversely, if you continue operating the business despite liquidity issues and accept new assignments, you may not be able to fulfil obligations—for example, due to a lack of raw materials. This could also form grounds for directors’ liability.

Tax authority

If you foresee that the company cannot pay its tax and/or social security contributions, you must notify the Tax Authority and/or the pension fund of the inability to pay. This must be done within two weeks after the payment was due. Failure to notify could lead to directors’ liability.

Lenders

Assuming the lender is a bank—which is typically the main financier—bank loans often include a current account credit facility. If liquidity problems arise, the bank may terminate financing and close access to the credit line.

Therefore, it is crucial to inform the bank as soon as possible and possibly request support in the form of additional credit. Be aware that the bank will require detailed financial information to assess your company’s viability. Nevertheless, it is not uncommon for a bank to hold the key to a company’s survival. Be mindful of the quality of the information you provide and what you aim to achieve with it.

Actions

In addition to informing stakeholders, there are other matters you should consider as a director.

Administration / accounting obligations

The obligation to maintain records that reflect the company’s rights and obligations continues even during severe liquidity shortages. This is a standard against which a trustee may assess your conduct if things go wrong. If the administration does not meet this standard, it is presumed that this failure significantly contributed to the bankruptcy. A director may then be held liable for all unpaid debts in the bankruptcy (the so-called bankruptcy deficit).

The same applies to annual accounts. If they are not filed on time, you are presumed to have performed your duties improperly—again presumed to be a major cause of the bankruptcy.

Continuing the business

As long as the company can meet its current and future obligations, you are not required to shut it down at the first signs of financial trouble. A business retains more value if it continues operating. However, once in doubt, it is wise to seek legal and financial advice promptly.

Selling the business or its assets

If you are considering this, a proper valuation is essential. The key question is whether a fair purchase price is being paid for the business or the assets.

You must also inform stakeholders—especially secured creditors (pledge or mortgage holders) and possibly the Tax Authority of the assets you intend to sell. These creditors play a role in the sale since a buyer will only purchase assets if they are transferred free of these security rights. Such rights remain attached until the pledgee or mortgagee formally releases them.

Finally, ensure you agree with all involved parties on a fair distribution of the proceeds from the sale.

As a director, you must proceed with caution because a trustee will always investigate whether the sale harmed (other) creditors.

A different way of working and leading

If the company is experiencing liquidity problems, your approach as a director must change. As explained above, you cannot remain passive, nor can you proceed as if nothing is wrong. Make a plan and gather enough information to keep a clear head during this difficult period—and to avoid liability.

More information

Do you have questions about this blog? Please feel free to contact us.