Draft bill on Expedited Liquidation Transparency presented

On 28 June 2021, the Minister of Justice presented a draft temporary bill on transparency of expedited liquidations (de tijdelijke wet transparantie turboliquidatie). As a result of the COVID-19 pandemic, the Minister expects that there will be an increase in the number of businesses that will need to be liquidated. Under Dutch law, the most efficient way to do this is through expedited liquidation (turboliquidatie). However, as the expedited liquidation barely provides for safeguards to creditors, it is often considered a mechanism that is open for abuse. The bill aims to improve legal protection of creditors and prevent abuse, and thereby facilitate the use of the expedited liquidation by good faith businesses.

In this blog, we will discuss the background, highlights and possible consequences of the draft bill.

1. Background

In the Netherlands, a legal entity can be rapidly dissolved by means of an expedited liquidation (turboliquidatie). This form of liquidation was introduced in 1994 in order to prevent abuse of shell legal entities and to clean up the number of registrations of inactive legal entities in the Commercial Register of the Dutch Chamber of Commerce. Today, the expedited liquidation is the most frequently used termination method for legal entities.

Under Dutch law, the first step to dissolution of a legal entity is a resolution to dissolve (ontbindingsbesluit). After the resolution to dissolve, the legal entity enters into the liquidation phase in which the liquidators will liquidate the assets, distribute the proceeds to the creditors and comply with various disclosure and notification requirements. However, according to section 2:19 (4) of the Dutch Civil Code ("DCC"), a legal entity that has no assets when the resolution to dissolve is passed ceases to exist immediately, regardless of whether the legal entity still has debts that, as a result, will remain unpaid. The board then simply reports the dissolution of the legal entity to the Chamber of Commerce and requests deregistration. In practice, to avoid the liquidation phase and the associated disclosure and notification requirements, the available assets are often liquidated and the proceeds distributed before the resolution to dissolve is passed. The resolution to dissolve is only passed when the legal entity no longer has assets; the legal entity thus immediately ceases to exist.

While such an efficient liquidation procedure has many advantages, it is open to abuse as it allows a business to be dissolved while it still has outstanding debts (without notification to its creditors) and with no requirement to account for the liquidation of assets that were available prior to the dissolution.

The draft bill entails a number of measures to increase transparency of the expedited liquidation, improve protection of creditors and reduce the risk of abuse.

2. Highlights of the draft bill

Publication of documents
(Section 2:19b (1) DCC)

Aiming for greater transparency, the draft bill provides for an obligation for directors that dissolve a legal entity by way of an expedited liquidation to disclose a number of documents with Commercial Register of the Dutch Chamber of Commerce. These documents include:

1. A balance sheet and a statement of assets and liabilities regarding the financial year in which the entity has been dissolved;
2. A statement of reasons for (i) the absence of assets and (ii) the failure to pay creditors upon dissolution;
3. In the event that creditors have been paid as part of the settlement of the legal assets before dissolution; a final distribution statement (slotuitdelingslijst); and
4. The annual accounts regarding the financial years preceding the year in which the entity has been dissolved (if the legal entity is obliged to publish annual accounts).
    

In essence, only the disclosure requirements listed under (ii) and (iii) are new; the requirements listed under (i) and (iv) are pre-existing obligations. Creditors can use this information to assess the financial situation of the legal entity prior to dissolution and consider whether it could be worthwhile to take (legal) action against the legal entity or its officers. A lack of compliance with these disclosure requirements is punishable under the Economic Offences Act. The maximum penalty is six months’ imprisonment and a fine of the fourth category (currently EUR 21,750).

Obligation to inform creditors
(Section 2:19b (2) DCC)

Once the documents have been disclosed, the directors must notify the creditors immediately (onverwijld). The draft bill stipulates that this notification has no prescribed form, meaning that a (solely) oral notification would be sufficient. In addition, the draft bill provides that there is only a notification requirement insofar as the necessary information is available to the board. The draft explanatory memorandum states that it is up to the creditors to ensure that their debtor is in possession of the correct contact details.

As the absence of strict rules regarding notification does not seem to be in line with the aims of the draft bill – transparency and creditor protection – and notification is essential to render the disclosure requirements effective, we anticipate that the bill may be amended to include stricter notification requirements.

Disqualification of directors
(Section 2:19c DCC)

The draft bill also introduces a disqualification (bestuursverbod) under civil law of (current and former) directors, or de facto directors. At the request of the Public Prosecutor, the court can disqualify a director from being on the board of any legal entity for a maximum period of five years. A disqualification can be imposed when a legal entity has been dissolved pursuant to an expedited liquidation while one or more creditors remain fully or partially unpaid, and:

• the director has failed to comply with the disclosure obligations set out above;
• the director intentionally performed or failed to perform acts on behalf of the legal entity resulting in one or more creditors being substantially prejudiced; or
• the director has, on two occasions during the previous two years, been involved in an expedited liquidation where one or more creditors remained unpaid, unless the director is not personally to blame.
   

The proposed disqualification of directors is similar to the disqualification of directors who have repeatedly been involved in bankruptcy, which was introduced into Dutch bankruptcy law in 2016. The threshold for a disqualification to be imposed seems rather high; for example, the explanatory memorandum explicitly provides that a fraudulent conveyance (actio pauliana) in itself might not be sufficient to find that one or more creditors have been intentionally and substantially prejudiced.

3. Legislative procedure

The public consultation on the draft bill closed on 27 July 2021. The Minister of Justice now has the opportunity to amend the draft bill before submitting it to the Dutch House of Representatives and subsequently to the Dutch Senate for approval. As this bill is, so far, intended to be a temporary bill to facilitate expedited liquidations as a result of the COVID-19 crisis, we expect that the legislative process will be expedited. Even so, we anticipate that this bill could remain in effect indefinitely, as the issues it addresses were pressing long before COVID-19.