Bill Temporary Turboliquidation Transparency Act
Nearly 90% of dissolved legal entities were wound down through turboliquidation in 2018.
Turboliquidation is a simple way to dissolve a corporation. Usually, the assets of the dissolved company are liquidated, i.e. distributed among the creditors. The liquidator is responsible for accounting for the liquidation. However, if a company no longer has assets, there is nothing to liquidate. The Board can then simply dissolve the company and report this to the trade register (article 2:19 paragraph 4 of the Civil Code). The company ceases to exist at that time, even if there are still unpaid debts.
This arrangement should enable an entrepreneur to wind down and terminate the business in a simple manner. The last assets can then be sold and paid out to his creditors. Subsequently, despite remaining debts, the legal entity is dissolved with a simple notification to the trade register.
The practice, however, is not as easy. Unpaid creditors can thwart the process by filing a request for the company’s bankruptcy. The statutory director also runs a risk of being held liable by an unpaid creditor. Consequently, turboliquidation is unfortunately an attractive option for unscrupulous entrepreneurs.
In order to increase confidence in turboliquidation transactions and at the same time counteract abuse, the Temporary Turboliquidation Transparency Act is now in the works. The new regulation is designed to increase transparency and improve the information position of creditors. This is based on introducing accountability of the Board and a right of inspection for the creditor if the Board fails in its accountability. In addition, the possibility of a civil administration ban should raise a barrier to malintent in dissolving a company without assets.
Accountability of the Board
A new Section, 2:19b of the Dutch Civil Code, is designed to require the director to create a number of documents in the event of turboliquidation, such as a closing balance sheet and a statement of income, with public access by filing them with the trade register.
Right of inspection creditors
If the director fails to comply with the accountability obligation – even when the filed documents are clearly incorrect or incomplete – a new Section, 2:19c of the Civil Code, gives creditors a right to inspect the legal entity’s retained records. However, this is subject to authorisation from the subdistrict court to exercise this right. Failure to comply with accountability also constitutes an economic crime.
Company director disqualification
The company director ban has been in force since 2016 for cases of bankruptcy fraud. It is now expanded by a new Section, 2:19c of the Civil Code. This gives (only) the Public Prosecutor’s Office the option of requesting a company director disqualification in case of malicious dissolutions. The company director ban applies for a maximum of 5 years.
The ‘Temporary’ aspect is mainly related to the funding of the law change. As a result of the COVID pandemic (or better) measures, an increase in business closures is now expected after all. For this reason, the amendment can apparently be financed from the temporary budget of a corona crisis support and recovery package, and has great urgency. The latter is a good thing, because legislative amendments can take forever to implement. Problems with malicious use of turboliquidation are, of course, structural. I have no hesitation in saying that the law – if passed – will become structural after the expiration of the intended 2 years and proven effects.