Expedited liquidation

We sometimes find ourselves dealing with entrepreneurs who want to liquidate one or more of their companies, and preferably as quickly as possible. A familiar option to achieve this is expedited liquidation. Lately, however, expedited liquidation has come under fire because of suspected abuse. For this reason, the government is working on a legislative proposal to tackle this abuse. In this contribution, we discuss various scenarios that may occur upon the dissolution of a company, the expedited liquidation, why the government thinks it should be tackled and what the legislative proposal entails.

Three scenarios

When a company is dissolved, various scenarios may occur:

  1. More assets than liabilities:

If a company has more assets than liabilities, the dissolution decision is followed by a phase in which the assets of the company are divided. This is also known as ‘liquidation’.

  1. Fewer assets than liabilities:

If a company has more liabilities than assets, the liquidator must apply to the court to file a winding-up petition for the dissolved company. The court will then appoint an insolvency practitioner who will liquidate the assets of the company in liquidation according to the rules of the Bankruptcy Act (Faillissementswet).

  1. No assets:

If a company has no assets (‘shell company’), the law stipulates that the company ceases to exist with immediate effect. This is also known as an ‘expedited liquidation’.

The expedited liquidation

With a ‘normal’ liquidation, an insolvency practitioner is appointed to verify whether the company has acted correctly in all is business dealings in the past. If the company has not done everything by the book, the insolvency practitioner may seek recourse against the director and major shareholder in person. This is in contrast to the procedure in an expedited liquidation, where no insolvency practitioner is involved. The resolution to dissolve a company by means of an expedited liquidation must be adopted by the general meeting of shareholders. Such a resolution may only be adopted if the company no longer has any assets, in which case liquidation of the assets is not necessary because there simply is nothing to liquidate. After the resolution has been adopted, the company is dissolved with immediate effect. All that remains is for the liquidation to be registered in the Commercial Register of the Chamber of Commerce.

Abuse

An expedited liquidation involves a high degree of ‘self-regulation’, which may make it attractive for some entrepreneurs to abuse this relatively easy manner of dissolving a company. This is because the entrepreneur could first divert all the money from the company to himself in his private capacity or to companies affiliated with the company to be liquidated before the expedited liquidation takes place. In such a situation, liabilities are left behind in the company, while assets are in fact available or at least were available to pay all or some of those liabilities. The entrepreneur leaves the creditors empty-handed, making them the victims of the expedited liquidation.

In order to combat this abuse, the Minister for Legal Protection wants to impose additional requirements on the expedited liquidation of a company, thereby putting creditors in a stronger position to be able to claim repayment of any money owed to them.

Legislative proposal

The legislative proposal will be submitted for consultation during the course of 2020. This legislative proposal is expected to include the following specific measures regarding the expedited liquidation of a company:

  • The management board will be obliged to draw up and file a closing balance sheet, relating to the financial year in which the expedited liquidation takes place.
  • The reasons for the absence of assets must be stated in an accompanying management statement.
  • Where applicable, these documents will be accompanied by a plan of final distribution.
  • The management board must arrange for a general announcement of the dissolution.
  • The announcement must state that the closing balance sheet together with the financial statements are available for inspection at the Commercial Register.
  • Finally, unless an exemption based on Section 2:394(5) of the Dutch Civil Code applies, the financial statements for all previous financial years must have been published before the company’s registration in the Commercial Register is cancelled.

According to the Minister, the proposed measures will contribute to improving transparency and accountability. Creditors will be in a better position to request a reopening of liquidation proceedings or to start civil proceedings.

We will keep you informed via our website of any developments on this subject.

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