Turboliquidation – or bankruptcy?

With an expected increase in companies winding down business, the tension between bankruptcy and turbo-liquidation is again all the more relevant. How those two possibilities are related is the subject of two recent rulings, each with its specific outcome.

Bankruptcy after turboliquidation still possible

At the The Hague district court bankruptcy hearing, it turned out that a legal entity for which a creditor had filed for bankruptcy, had in the meantime been dissolved by means of turboliquidation under Section 2:19 paragraph 4 of the Civil Code. Thus, the legal entity no longer existed. Yet bankruptcy is still possible in this event. The court quotes the assessment framework:

If the court finds that there is summary evidence of facts and circumstances that make it sufficiently plausible that there are still assets The assets of a Dutch company reflect the value of all that the company possesses
» Meer over assets assets, then – if the other requirements for declaring bankruptcy have been met – it can declare bankruptcy and the legal entity must be deemed to have continued to exist for the purposes of the liquidation (Supreme Court 27 January 1995, ECLI:NL:HR: 1995: ZC1631)

Thus, a creditor who requests the bankruptcy of a legal entity that has already been dissolved by turboliquidation will have to assert and make plausible that there are still assets. In the present case, that went wrong. Probably because the creditor did not find out about the turboliquidation until the hearing, but of course also because a creditor suffers from a huge information backlog. The bankruptcy petition was dismissed.

Potential director liability

In the second case, the court of appeal of the Arnhem-Leeuwarden district ruled in appeal on a request for the bankruptcy of a legal entity dissolved by turboliquidation. The court had rejected the request because it had not become apparent at the hearing that the contracting company already dissolved was in suspension of payment (Section 1 Fw). On appeal, the creditor was better prepared. The court not only found that the conditions for bankruptcy had been met, but also saw potential benefits. In the facts presented and based on the discussion at the hearing, the court saw a potential claim based on liability of the (indirect) directors of the contracting company on a private basis.

The court saw potential director liability in continuing the company for too long despite a severe economic climate, side activities and lack of transparency about a settlement offered to creditors. Accordingly, bankruptcy was declared and a trustee was appointed to conduct further investigations.

The Achilles’ heel of turboliquidation

These rulings illustrate the Achilles’ heel of turboliquidation: the risk of malintent and the information deficit of the aggrieved creditor. Spurred on by the COVID pandemic, the legislature is now tinkering with an amendment to the turboliquidation regime. The bill Temporary law on transparency turboliquidation should provide entrepreneurs with a suitable instrument to dissolve their business in a controlled manner while improving the position of creditors and preventing abuse. The current regulation will be expanded for this purpose with an accountability obligation for the director and the right of inspection for the creditors, as well as the sanction of a company director disqualification for the malicious entrepreneur.

Learn more about turboliquidation bill? See ‘Temporary Turboliquidation Transparency Act’.