The creditor in a turbo liquidation – missing out because of a lack of information?

Turbo liquidation has been in the news a lot in recent years, not least because of potential abuses of this instrument. An example is the large criminal case of the Public Prosecutor's Office in Amsterdam against fourteen suspects (including three civil-law notaries) in 2019. In it, years of prison sentences were demanded for massive fraud with so-called 'plof-BVs': by making companies 'disappear', millions in debts were left unpaid.

The main objection to turbo liquidation is the fear that it enables entrepreneurs to 'empty' a company (remove everything of value from it), without external supervision and without considering the interests of creditors, after which the company simply 'disappears' (is dissolved and deleted from the Trade Register). The question is whether this fear is always justified. The legislator's intention in introducing the turbo liquidation was to be able to wind up empty companies without unnecessary administrative actions. This would relieve the burden on trustees (the liquidation of so-called 'empty estates' through bankruptcy incurs high costs for society) and reduce the number of 'dormant' companies (resulting in a reduction of the administrative burden). When viewed in this way, the turbo liquidation is a legitimate means with social value.

However, it is often unclear to a creditor who sees his debtor simply disappear whether there is a legitimate turbo liquidation or an unlawful 'disappearing act', what his rights are, and above all, how he can obtain information to assess all this. This blog addresses that.

The turbo liquidation

One of the ways in which the existence of a legal entity ends is by passing a resolution to dissolve it. The legal entity then comes to be 'in liquidation' (and must also put that after its name on its letterhead). Liquidation means that a liquidator comes into office (usually the last director) who must 'liquidate' all the assets of the legal entity. In other words: liquidate the assets, pay the debts, and distribute any surplus to the entitled parties. In the case of a limited liability company (BV and NV), these are usually the shareholders. The blog is confined to these types of companies.

An ordinary liquidation can take a considerable amount of time (sometimes years) and has all kinds of rules intended to ensure supervision (such as the liquidator having to file public accounts). Compared to an ordinary liquidation, turbo liquidation is a quick(er) and easy(r) way to terminate a company. However, a turbo liquidation can only take place if the company no longer has any assets. This term should be interpreted broadly: not only current assets, but also future ones, such as a deferred tax return or even a claim by the company on the director for improper performance of his duties, fall within the definition of assets in a turbo liquidation. In order to decide in favour of a turbo liquidation, it is not important whether the company still has debts: if there are no more assets, but still outstanding debts, a turbo liquidation can be initiated.

How does a turbo liquidation take place?

The 'turbo' character of a turbo liquidation consists, as mentioned above, of dissolving the company (by means of a general meeting resolution) without subsequently conducting liquidation proceedings. The management board of the company must assess whether the company still has assets. If the management board finds that there are no more assets and the general meeting has subsequently adopted the resolution to dissolve the company, the company ceases to exist at the time of the passing of the resolution. The management board must report the dissolution and the end of the company's existence to the Chamber of Commerce. However, this form of dissolution only works if there are absolutely no assets at the time of the resolution for dissolution. If there are assets at that time, the company will continue to exist 'in liquidation' as described above, despite the resolution of the general meeting.

Potential abuse

Due to the ease with which a turbo liquidation can be achieved and the lack of external control, there is a certain risk of abuse. This is because the required shareholder resolution for dissolution is not an obstacle in the (common) figure of the one-person limited company, where the sole director is also the sole shareholder. In the past decade, in about 80% of turbo liquidations there were no assets. This means that in about 20% of the cases there were (presumably) assets still present, so that the remedy of the turbo liquidation was wrongly applied.

Whereas a liquidator in a bankruptcy investigates the state of affairs in the company prior to the bankruptcy, including possible improper performance of duties and/or fraudulent conveyance, this is not the case in turbo liquidation. With a turbo liquidation there will never be a liquidator in office. There is also no independent supervisory body (such as a judge). Improper actions, such as the unlawful withdrawal of assets, improper performance of duties and other malpractices can easily be covered up.

Abuse of the method of turbo liquidation can lead to director liability. If a director falsely maintains that there are no more assets and deliberately allows the company to dissolve, such a director may be ordered to compensate the damage with his private assets. Wrongful acts may occur, for example, if the turbo liquidation has made the payment of a debt or the performance of an obligation impossible. This may be the case, for example, if assets are unlawfully withdrawn from the company or if assets are (deliberately) concealed in order to create the impression, against one's better judgement, that the company no longer has a claim.

The creditor in a turbo liquidation

As mentioned above, it is also possible to carry out a turbo liquidation while the company still has debts, which implies that the turbo liquidation can be very disadvantageous for creditors. They are not informed in advance of a proposed turbo liquidation. Moreover, creditors often do not have information that would enable them to assess whether the company actually had no more assets at the time of dissolution (let alone that they know the reason why there were no more assets; in other words, where the assets have gone). In practice, this means that a creditor may suddenly be faced with a debtor who has been dissolved, leaving the debt unpaid. Often creditors only become aware of this when, after a long radio silence on the part of their debtor, they look in the Commercial Register and then by chance see that the company has been dissolved and no longer exists.

Possibilities for creditors

The creditor has a few options to check whether turbo liquidation has taken place rightly and properly. For example, the creditor can apply to the court for the reopening of the liquidation, he can file for the bankruptcy of the legal entity or the creditor can even directly file a directors' liability claim.

For all these actions, however, the creditor must make a plausible case that there are (still) assets in the company. Although this threshold is not high, in practice the difficulty often arises that a creditor does not have the necessary information. A mere suspicion that there are still assets is not enough: there must be concrete indications. Moreover, the management board of a company that no longer exists will not easily be inclined to provide this information voluntarily, with the risk that they will help the creditor in filing a director's liability claim.

Information from the Chamber of Commerce, for example, can sometimes help to make it plausible that there were still assets in the company at the time of the dissolution. For example, if the last annual accounts show that the company was still fully operational as of December 31 and had substantial assets, but as of January 31 of the following year the company suddenly appears to have been turbocharged without the former management being able to give a satisfactory explanation of where those assets have gone, a reason can be provided to dig deeper.

An alternative way of finding out about the state of affairs (and possibly concealed assets) is, for example, to demand information through the courts on the basis of Article 843a of the Dutch Code of Civil Procedure. If the claimant can show that the information requested relates to a legal relationship to which he is a party (this may also be a wrongful act claim) and that he has a legitimate interest in seeing that information (which may also be to determine his own legal position), the court may order the debtor to provide that information to the creditor. However, the request for information must be sufficiently specific and may therefore not involve a fishing expedition. The costs of such proceedings unfortunately do not always outweigh the benefits, especially if there are insufficient concrete indications that something has been done wrong in the liquidation.

It is also possible to request a preliminary witness examination from the court in order to hear directors of the dissolved company. A preliminary witness examination is a low-threshold figure that is usually allowed in practice, unless the applicant for it is obviously abusing his rights. A preliminary witness examination offers the opportunity to ask the witnesses/directors questions about the presence of possible benefits or other facts. This can then provide information on the basis of which the liquidation can be reopened. Again, there should be no fishing expedition and the questions should be sufficiently specific. A director who is in bad faith and has tried to conceal assets through the turbo liquidation may not be honest even in court. Nevertheless, an examination of witnesses can lead to good outcomes even in difficult cases, because in practice it is perceived as a serious matter.

If the creditor has been able to make it plausible that there are assets in the company, the court can reopen the liquidation or declare bankruptcy. Since there has been no prior liquidator in the case of turbo liquidation, the court will have to appoint a liquidator who will have to carry out further investigation into the presence of assets. Creditors who are considering reopening the liquidation process would therefore be wise to ensure in advance that they can nominate an experienced, critical third party as the liquidator (for example a forensic accountant who can get to the bottom of things). If it indeed turns out that there are still assets, but they are not enough to pay the outstanding debts, the freshly appointed liquidator will have to file for the dissolved company's bankruptcy immediately. In some situations, the bankruptcy of a dissolved company can also be filed immediately instead of reopening the liquidation. In that case a trustee will be appointed who, if there is sufficient cause, can bring a claim for improper performance of duties against a director in order to perhaps achieve some positive result for the joint creditors. Whether the creditor actually benefits from this will depend on the amount of ('late') assets, the number and ranking of the creditors, and the costs of/in the bankruptcy.

How to proceed?

Do you have any questions about your options as a creditor in a turbo liquidation? If you are a creditor facing turbo liquidation, we will be happy to discuss with you the possibilities of recovering your claim. If you are considering turbo liquidation yourself, we will be happy to discuss the possibilities with you.

Contact Anique Noordam or Marjon Lok or the Corporate Litigation & Dispute Resolution team.