Bill on transparency turboliquidation

UPDATE III
On 5 July 2023, the Official Dutch Gazette (Staatsblad, Stb. 2023, 244) was published indicating that the Bill will enter into force on 15 November 2023.

UPDATE II
On 14 March 2023, the Dutch Senate (Eerste Kamer) passed the Temporary Transparency Turboliquidation Act (Tijdelijke wet transparantie turboliquidatie). The Bill is expected to enter into force on 1 July 2023.

UPDATE I
On 16 February 2023, the House of Representatives (Tweede Kamer) passed the Bill without changes or amendments. The Bill is now on the agenda of the Senate of 14 March 2023.

Legislation must offer a simple, quick, but orderly process of the dissolution of a (dormant) legal entity. The risk of creditor detriment when dissolving empty legal entities, and maintaining a public trade register with many dormant legal entities are two reasons why this is of utmost importance. The Dutch legislator created so-called ‘turboliquidation’ as early as 1994.[1] But in practice, that regulation appears to be prone to abuse and legal uncertainty.

Turboliquidation is different to the conventional process of dissolving a legal entity. This is because turboliquidation involves no liquidation of assets, and the legal entity immediately ceases to exist as soon as the resolution to dissolve has taken place. At that moment, there are no assets present. This allows empty legal entities to be disposed of quickly and easily without court intervention or prior public announcement. Therefore, turboliquidation became - despite the criticism from literature and practice - extremely popular in the Netherlands. The criticism focused mainly on the lack of checks and balances regarding the position of the remaining creditors and the lack of financial statement obligations. With the Temporary[2] Transparency Turboliquidation Act[3] (Tijdelijke wet transparantie turboliquidatie) (Bill), the Dutch legislator tries to address this criticism.

Below, we discuss the following topics. We start with a brief description of what turboliquidation is according to Dutch law and what the pitfalls are in its application. We then discuss the Bill and conclude with some points of interest for practice.

What is turboliquidation according to current legislation?

The laws of the Netherlands provide for multiple ways in which any legal entity can cease to exist. The simplest, cheapest, and fastest way for a legal entity to cease to exist is through so-called turboliquidation. Turboliquidation is regulated by Article 2:19(4) of the Dutch Civil Code (DCC). This article provides inter alia that if a legal entity has no assets at the time that the resolution to dissolve the legal entity is taken, it ceases to exist at that exact moment. To dissolve a legal entity by means of turboliquidation, the below steps must be followed pursuant to current legislation:

1. the board notes that the legal entity has no assets and confirms this to the General Meeting (unless it is a foundation);[4]
2. then, the general meeting of shareholders or – in case of a foundation – the board, resolves to dissolve the legal entity (Article 2:19a(1) DCC);
3. the legal entity immediately ceases to exist (Article 2:19(4) DCC); and
4. the board notifies the trade register (Handelsregister) of (i) the dissolution, (ii) the lack of assets and (iii) the fact that the legal entity has ceased to exist (Article 2:19(4) DCC).

Much criticism has been expressed in the literature regarding turboliquidation.[5] In short, creditors could be disadvantaged by its application. There are many examples in case law that support this criticism. For instance, the Court of Appeal of 's-Hertogenbosch concluded that creditors were unfairly left empty-handed by application of the turboliquidation.[6] Besides that, creditors have insufficient legal remedies to oppose any detriment. To prevent such abuse, the Dutch minister for Legal Protection (minister voor Rechtsbescherming) (Minister) on 12 July 2022 submitted the Bill containing a revised regulation regarding turboliquidation.[7] On 16 February 2023 the House of Representatives (Tweede Kamer) will vote on the draft Bill after which it will be sent to the Senate (Eerste Kamer) for adoption. It is currently unknown when the Bill will come into force, but it is currently expected to be no later than 1 July 2023.

What is the turboliquidation under the Bill?

Pursuant to the Bill, the board of the legal entity is given an enhanced accountability obligation in case of a turboliquidation. If the management board is found to be in breach of this accountability obligation, a management injunction (bestuursverbod) may follow. The accountability obligation and the management injunction are regulated in two new sections of the law, Article 2:19b and 2:19c DCC. The accountability obligation and the management injunction apply in addition to the already existing remedies to oppose abuse of turboliquidation.

Article 2:19b DCC (new): the accountability obligations of the board

The proposed accountability obligations consist of two elements.

Firstly, the board is obliged to file the following documents with the trade register where the legal entity is registered (the Dutch trade register and, if applicable, the foreign public registers) within 14 days of the dissolution of the legal entity:

• a balance sheet and a statement of income and expenses relating to the financial year in which the legal entity was dissolved and the previous financial year if, at the time of dissolution, annual accounts for that year have not yet been made public yet;
• a description of:
  • the reason for the lack of assets at the time of its dissolution;
  • how the legal entity's income has been realised, if any, and how proceeds of the legal entity have been distributed among its creditors; and
  • the reason(s) why creditors of the legal entity may have remained unpaid; and
• the annual accounts for the financial years preceding the financial year in which the legal entity was dissolved, if there is a duty to disclose them pursuant to Article 2:294(3) DCC which has not yet been complied with, including, where applicable, the auditor's report referred to in Article 2:393(5) DCC.

Secondly, immediately after filing the above documents, the former management board must give written notice to any creditors who have remained unpaid in whole or in part. The rationale behind this obligation is to avoid leaving creditors in the dark and discovering, after a long period, that their debtor no longer exists. This communication must therefore be in writing. The consultation Bill did not yet include the written notice requirement. However, several consultation responses pointed to the possible problems of proof that this could entail. The Bill has therefore been amended regarding this point. According to the explanatory memorandum of the Bill, the requirement of a written form of communication can also be met electronically.

Failure to comply with the accountability obligation laid down in Article 2:19b DCC (new) has no effect on property law (geen goederenrechtelijk effect). This means that it therefore has no effect on whether the legal entity has been dissolved or ceased to exist.

Article 2:19c DCC (new): management injunction (bestuursverbod)

In addition to the new accountability obligation, the Bill entails a broadening of the cases in which a management injunction can be imposed. If the legal entity has ceased to exist by means of turboliquidation, leaving one or more creditors wholly or partly unpaid, the court may, at the request of the Public Prosecutor's Office (Openbaar Ministerie), impose a management injunction in the following three cases:

• if the management board has not fulfilled its accountability obligation as laid down in section 2:19b(1) DCC (see above); or
• the director deliberately performed or omitted to perform acts on behalf of the legal entity which caused one or more creditors to be materially prejudiced; or
• two years prior to the dissolution, the managing director - acting as a managing director or as a natural person in the exercise of a profession or business - was involved at least twice before in a termination of a legal entity in abandonment of debts (in the event of bankruptcy or turboliquidation in abandonment of debts) and can be blamed personally.

A director who is imposed for a management injunction can no longer hold the position of director or supervisory director. The management injunction can be imposed for a maximum duration of five years. Once a management injunction is irrevocably imposed, it will be registered at the trade register of the Chamber of Commerce (het Handelsregister bij de Kamer van Koophandel).

Pursuant to current legislation, the Public Prosecution Office already has the possibility under Article 106a Bankruptcy Act (Faillissementswet) to request the court to impose a management injunction. This possibility is very rarely used in practice - only five times in the period from 2016 to 2020.[8] One may wonder to what extent the public prosecutor's office has sufficient knowledge and capacity to take on this new supervisory role.

Concluding

On 16 February 2023 the House of Representatives (Tweede Kamer) will vote on the draft Bill. The draft Bill will most likely be adopted in its current form and will then be sent to the Senate (Eerste Kamer) for adoption. It is not yet known when the Senate will vote on the draft Bill. Particularly because of the new accountability measures, thorough administration and good corporate housekeeping will become increasingly important. Because the management board will have to proactively approach the remaining creditors, the responsibility that creditors are aware of the turboliquidation shifts to the management board. The board will therefore have to ensure that proper and complete records are kept, including the contact details of all creditors. In the absence of this, the regular dissolution process whereby the assets are liquidated through the statutory liquidation procedure seems more obvious.

Included below is an overview of the steps to be followed when applying turboliquidation once the Bill is adopted in its current form.

Step 1: No assets

The board determines that the legal entity has no assets.

Step 2: Resolution to dissolve the legal entity

The general meeting or - in the case of a foundation - the board, takes a decision to dissolve as of which moment the legal entity ceases to exist, pursuant to Article 2:19(4) DCC.

Step 3: Accountability: filing documents

Within 14 days, the board must file the documents referred to in Article 2:19(4) DCC (new) with the Chamber of Commerce (Kamer van Koophandel).

Step 4: Notice to creditors

The board shall notify the remaining creditors in writing immediately after the deposit, according to Article 2:19b(2) DCC (new).

You can read the full Bill in Dutch here

[1] Kamerstukken II 1991/98, 22 482 nr. 3.

[2] Several political parties questioned the temporary nature of the Bill during its most recent written discussion on 11 October 2022. As of the publication of this article, the legislator has not yet responded to these questions. However, in the Explanatory Memorandum of the Bill that a temporary legislative amendment was chosen for budgetary reasons. The changes that the Bill will entail will in fact be funded from a budget that has been made available for the pandemic financial assistance packages. According to the Minister, this budget is temporary in nature and therefore available only for two years. However, it can be extended by decree (Koninklijk besluit).

[3] Kamerstukken II 2021/22, 36 172 nr. 3.

[4] This step does not follow from the law but, in practice, the general meeting of shareholders will rely on this determination by the board.

[5] See e.g., B. Driss, ‘Turboliquidatie van de BV en doorstart van onderneming’, MvO 2020/3&4, p. 126-132; S. Renssen, De turboliquidatie van de Besloten Vennootschap (Diss. Maastricht, Serie van Der Heijden Instituut, nr 131), Deventer: Kluwer 2016; M.Y. Nethe, Turboliquidatie: oorbaar gebruik, abusievelijk gebruik en misbruik, in: Handboek Notarieel ondernemingsrecht, B.V. en N.V., serie Van der Heijden Instituut, Deventer: Wolters Kluwer 2016, p. 405-493

[6] Court of Appeal ’s-Hertogenbosch 14 mei 2019, ECLI:NL:GHSHE:2019:1825.

[7] Kamerstukken II 2021/22, 36 172 nr. 3

[8] Three times in 2018, three times in 2019 and three times in 2020, of which a total of five were requested by the Public Prosecutor's Office, please be referred to: L. Carrière-Verlinden & D.K. Baas, ‘Het civielrechtelijke bestuursverbod van 2016 tot en met 2020’, OR 2021/48.