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Temporary law on transparency turboliquidation

Like the House of Representatives (on Feb. 16 last year), the Senate (on March 14 last year) disposed of the bill “Temporary Turboliquidation Transparency Act”...

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Like the House of Representatives (on Feb. 16 last year), the Senate (on March 14 last year) disposed of the bill “Temporary Turboliquidation Transparency Act” as a hammer piece. The law provides for a (temporary) amendment to the regulation concerning turboliquidation. The aim is to increase confidence in the scheme and thus make turboliquidation a more accessible tool for entrepreneurs who – whether due to the effects of the COVID-19 virus outbreak or not – wish to terminate their businesses.

Turboliquidation

A legal entity is dissolved by a resolution of the general meeting of shareholders. After that, liquidation of the company will follow. If there are no anticipated benefits at the time of dissolution, then no liquidation follows and the legal entity immediately ceases to exist. This is also known as the “turboliquidation. In the absence of financial accountability for the board, the risk of abuse of turboliquidation lurks. Indeed, in anticipation of a dissolution decision, a malicious director can cause assets to be transferred so that the legal entity has debts but no income. Then a dissolution decree can be used to bring about the legal entity’s termination. Creditors are subsequently faced with a debtor who no longer exists and have no insight into the debtor’s latest financial status.

To combat abusive dissolutions, the law introduces a financial accountability and disclosure requirement for directors and the possibility of imposing a civil management ban in cases of abuse.

Financial Accountability

First, the bill provides for an obligation of the (former) board to disclose a number of documents if the legal entity has been dissolved through a turboliquidation. These documents provide financial accounting for the dissolution of the legal entity and any prior actual liquidation. They are:

  • a balance sheet and a statement of income and expenses for the fiscal year in which the legal entity was dissolved and the preceding fiscal year if no financial statements have yet been made public for that purpose;
  • A written explanation showing the cause of the absence of income, the existence of any debts and – if any – how the assets of the legal entity were disposed of prior to dissolution; and
  • accounts if there are disclosure obligations that have not yet been met.

These documents must be filed by the board with the commercial register and any other registers in which the legal entity is registered within fourteen days of the dissolution of the legal entity. In addition, the board must promptly notify any creditors of these filings in writing.

Inspection rights

If there are grounds for assuming that accountability has not been met, creditors may inspect the records of the dissolved legal entity with the authorization of the subdistrict court. After all, creditors should be able to verify that the legal entity was properly terminated and that assets were properly disposed of. The right of inspection allows creditors to assess (as yet) whether and which recovery proceedings (reopening of the liquidation, bankruptcy petition or director’s liability) they would like to initiate, and puts them in a better position to meet their burden of proof in any proceedings.

Administration ban

In the case where debts remain, this bill additionally allows directors to be banned from management by civil law if they:

  • failed to comply with the proposed filing requirement;
  • deliberately caused significant prejudice to one or more creditors in the run-up to the dissolution; or
  • have repeatedly been involved in a dissolution without assets leaving debts or in bankruptcy and are personally blamed for it.

Temporary arrangement

Due to its linkage with the support and recovery package in the context of the COVID-19 outbreak, the statutory scheme is temporary in nature and is basically valid for two years. However, the law can be extended if there is an intention to permanently implement the measures contained in the law – in modified form or not. This is to meet the longstanding desire for a (more) structural arrangement of turboliquidation. The effective date is not yet known, but a short-term entry into force is envisioned.

This contribution was written by mr. Jeroen van der Pouw Crane, affiliated with the Corporate and Insolvency Law practice groups.