Dutch law regulating ‘turbo liquidations’ takes effect

Frits Burg of Pinsent Masons in Amsterdam said the new rules are designed to address risks of fraud and protect creditors’ interests.

Dutch law provides that a company can be dissolved through a resolution of the general meeting to that effect, unless the articles of association of the company requires prior approval from another corporate body, such as the board of directors or supervisory board.

If a company has no assets at the moment of dissolution, the company ceases to exist from the moment that the resolution of the general meeting becomes effective. There is no formal statutory liquidation procedure to follow, though the resolution of the general meeting would be filed with the trade register of the Chamber of Commerce to de-register the company. The speed with which companies can be dissolved in this manner has resulted in the term ‘turbo liquidations’ being coined in the Netherlands – the term is not defined in statute.

More than 40,000 turbo liquidations were recorded in the trade register last year, but the unregulated process and fact that creditors did not need to be informed when companies were being dissolved raised concern about the scope for fraud and creditors’ interests being unprotected. Creditors, for example, had no way of confirming that the company had no funds to pay its debts because they had no right to information about how the company was administered and nor were the annual accounts filed in the trade register, as they would be under the regular liquidation procedure in the Netherlands.

To address this, Dutch legislators moved to amend provisions of the Dutch Civil Code, the Bankruptcy Act and the Economic Offences Act, to introduce a new system of regulation for turbo liquidations. The new legislation was adopted on 14 March 2023 but only came into force on 15 November 2023.

Under the new legislation, the managing directors of the company are required to file a series of documents with the trade register within 14 days of the resolution to dissolve the company being executed. These include a balance sheet with respect to the financial year in which the company is dissolved; a report stipulating the reasons why the company no longer has any assets on the date of dissolution and, if applicable, the way in which the company’s assets were liquidated, the proceeds distributed and if a creditor has not been paid, the reasons why not; and annual accounts of previous financial years that have not been published, if the company is obliged to file annual accounts.

The managing directors must further send a written notification to the creditors informing them that those documents have been filed with the trade register.

The new regime also provides for inspection rights and potential sanctions to be imposed in the event of non-compliance.

Where the filing obligation has not been met, or incorrectly met, creditors can apply for a court ruling to allow them to inspect the administration of the company. In addition, failure to comply with the new legislation can also result in managing directors, at the request of the Public Prosecution Service, being prohibited from holding a director position at any Dutch company for up to five years. Managing directors can also, in some cases, be held personally liable for damages incurred by creditors.

The new legislation has been designed to apply for a two-year period only – it is specifically targeted at ensuring regulation of a wave of turbo liquidations that is expected to arise as many businesses continue to struggle to recover from the Covid-19 pandemic. An option to extend the legislation is contained in the law.

“Statistics show that on average 40,000 turbo liquidations take place each year and we expect this to continue to be the market practice,” Frits Burg said.

“Although the new legislation is expected to increase transparency, and as such prevent the use of turbo liquidation in fraudulent transactions, we do not expect strict supervision of the process. Therefore, turbo liquidations are still at risk to be used for fraudulent means and other than for their intended use. We do, however see turbo liquidation being used in a cost- and time-effective manner in larger group structures where there is no risk of abuse and parent companies simply assume the liabilities, if any, of their subsidiaries,” he said.