On 14 March 2023, the Dutch Senate approved the Fast-Track Liquidation Transparency (Temporary Amendment) Act (in Dutch: Tijdelijke wet transparantie turboliquidatie, or "Twtt" for short). Following publication in the Government Gazette, the Twtt will enter into force swiftly. This blog will look into the major points of the Twtt.
Executive summary
The bill as approved can be outlined as follows:
- strengthened accountability and disclosure requirements (Article 2:19b of the Dutch Civil Code (DCC) - new);
- amending the present rules on the imposition of director disqualification (Article 106a of the Bankruptcy Act (in Dutch: Faillissementswet, or "Fw" for short) and the possibility of imposing director disqualification (Article 2:19c DCC) in the event of repeat fast-track liquidations;
- expanding the right of inspection for creditors (Article 2:24(4) DCC).
Reason for the bill
Expectations are that the COVID-19 pandemic and its economic effects will prompt a considerable number of entrepreneurs to cease activities. As a matter of principle, it is appropriate to facilitate an efficient way to cease a business.[1] In addition to the regular way of winding up and liquidating a legal entity (Article 2:19 ff. DCC), the fast-track liquidation process (or turboliquidatie as it is known as in Dutch) of Article 2:19(4) DCC fulfils that need in normal circumstances.
Although the name suggests otherwise, a fast-track liquidation does not involve liquidation (the process of realising upon assets and settling liabilities) at all. If the legal entity in question does not have any assets at the time of the resolution to wind-up, there is no need for liquidation. Dutch statute (Article 2:19(4) DCC) provides that the legal entity ceases to exist at the very moment it no longer has any assets - even if it still has liabilities to settle. The number of options available to creditors to oppose a fast-track liquidation is rather limited. Not surprisingly, creditors tend to remain unpaid in the event of a fast-track liquidation.
Given the circumstances as they are, the legislator also anticipates a - temporary - increased risk of abuse of the fast-track liquidation process. In the Explanatory Memorandum to the bill, the legislator notes that the (expected) increase calls for - temporary - measures to limit the risk of unpaid debts due to unlawful or fraudulent acts by directors.
Purpose of the bill
The changes to Book 2 DCC have the purpose of protecting the position of creditors (joint or otherwise) in the event of a fast-track liquidation. The - temporary - measures will also increase the transparency of the procedure and be more effective in combating its abuse[2].
The purpose of the measures is, on the one hand, to make the procedure more accessible so as to meet the aforementioned need of entrepreneurs, and on the other hand to increase the confidence in this particular liquidation method. In the Explanatory Memorandum, the legislator earmarked as a desired result of the measures the possibility to retain this type of liquidation while enhancing the options of recovery for creditors whose interests have been prejudiced.[3]
Main points of the bill
The bill provides for strengthened accountability and disclosure requirements for the, present or former, directors of the wound-up legal entity, an addition to the existing director disqualification option , and an expanded right of inspection for creditors.
Element A: Directors' accountability and disclosure obligation
Article 2:19b(1) DCC (new) obliges the directors, current and former alike, to disclose the following documents in case of a fast-track liquidation.
- A balance sheet and a statement of income and expenditure for the financial year in which the legal entity was wound-up;
- A written statement describing the cause of the lack of assets and, if applicable, the reasons for leaving creditors unpaid;
- A description of the distribution of the proceeds prior to the wound-up; and
- The financial statements for the financial years preceding the year in which the legal entity was wound-up, if the statutory obligation to make these public has not yet been fulfilled.
The above documents must be filed with the trade register of the Chamber of Commerce within fourteen (14) days after the resolution to wind up the entity was taken. This accountability and disclosure obligation is applicable whether or not the wound-up legal entity leaves any liabilities behind.[4] Failure to comply constitutes an economic offence.
Element B: Director disqualification
The – temporary – measures of the bill provide the Public Prosecutor, in the event of (abuse of) the fast-track liquidation, for the possibility of seeking an order from the court to disqualify - current and former - director (or directors) in case of:
- not complying with the obligations referred to under Element A (obligations of accountability and disclosure), or
- personal culpability of the (former) director(s), or
- involvement within two years prior to the fast-track liquidation in the termination of at least two legal entities, either as director or directors, or as natural person or persons in the pursuit of professional or commercial activities.
If the entity has been declared bankrupt, the court may, at the request of the bankruptcy trustee or the Public Prosecutor, decide to disqualify a director if this director was involved in at least two (2) bankruptcies and/or liquidations of a legal entity in the three (3) years preceding the bankruptcy in question. The director disqualification can be requested by means of a regular civil-law petition[5] and the disqualification can be for up to five (5) years.[6]
Element C: Right of inspection
Creditors of a legal entity that has been wound up by the fast-track liquidation procedure obtain a right to inspect the books and records of that entity. This right may be exercised following an authorisation granted by the sub-District Court (Article 2:24(4) DCC - new). Giving creditors this right makes it easier for them to verify whether any irregularities occurred prior to the liquidation and/or whether the assets and liabilities of the legal entity were correctly realised and settled.[7] The creditor's request must be accompanied by a statement to the effect that the creditor has a reasonable interest in being granted the authorisation. A further condition for an authorisation is that the board of directors of the entity involved failed to fulfil the obligations of accountability and disclosure obligations (Element A).[8]
Temporary nature of the bill
The bill will initially be in effect for a period of two years, but it does provide for the option of becoming permanent - if certain conditions are met. One such condition is that the effects of the temporary measures need to be evaluated.
In conclusion
In short, the legislator has built several safeguards into the frequently used fast-track liquidation procedure, which entrepreneurs will be required to comply with. If you have any questions about ceasing activities as an enterprise, or if you are a creditor faced with a debtor fast-tracking liquidation, feel free to contact us.
[1] Parliamentary Papers, session year 2021/ 22, 36 172, no. 3, p. 2.
[2] Parliamentary Papers, session year 2021/22, 36 172, no. 3, p.2
[3] Parliamentary Papers, session year 2021/ 22, 36 172, no. 3, p. 7.
[4] Parliamentary Papers, session year 2021/ 22, 36 172, no. 3, p. 9.
[5] Parliamentary Papers, session year 2021/ 22, 36 172, no. 3, p. 23.
[6] Article 106b (1) of the Bankruptcy Act.
[7] Parliamentary Papers, session year 2021/ 22, 36 172, no. 3, p. 12.
[8] Parliamentary Papers, session year 2021/ 22, 36 172, no. 3, p. 27.
On 14 March 2023, the Dutch Senate approved the Fast-Track Liquidation Transparency (Temporary Amendment) Act (in Dutch: Tijdelijke wet transparantie turboliquidatie, or "Twtt" for short). Following publication in the Government Gazette, the Twtt will enter into force swiftly. This blog will look into the major points of the Twtt.
Executive summary
The bill as approved can be outlined as follows:
- strengthened accountability and disclosure requirements (Article 2:19b of the Dutch Civil Code (DCC) - new);
- amending the present rules on the imposition of director disqualification (Article 106a of the Bankruptcy Act (in Dutch: Faillissementswet, or "Fw" for short) and the possibility of imposing director disqualification (Article 2:19c DCC) in the event of repeat fast-track liquidations;
- expanding the right of inspection for creditors (Article 2:24(4) DCC).
Reason for the bill
Expectations are that the COVID-19 pandemic and its economic effects will prompt a considerable number of entrepreneurs to cease activities. As a matter of principle, it is appropriate to facilitate an efficient way to cease a business.[1] In addition to the regular way of winding up and liquidating a legal entity (Article 2:19 ff. DCC), the fast-track liquidation process (or turboliquidatie as it is known as in Dutch) of Article 2:19(4) DCC fulfils that need in normal circumstances.
Although the name suggests otherwise, a fast-track liquidation does not involve liquidation (the process of realising upon assets and settling liabilities) at all. If the legal entity in question does not have any assets at the time of the resolution to wind-up, there is no need for liquidation. Dutch statute (Article 2:19(4) DCC) provides that the legal entity ceases to exist at the very moment it no longer has any assets - even if it still has liabilities to settle. The number of options available to creditors to oppose a fast-track liquidation is rather limited. Not surprisingly, creditors tend to remain unpaid in the event of a fast-track liquidation.
Given the circumstances as they are, the legislator also anticipates a - temporary - increased risk of abuse of the fast-track liquidation process. In the Explanatory Memorandum to the bill, the legislator notes that the (expected) increase calls for - temporary - measures to limit the risk of unpaid debts due to unlawful or fraudulent acts by directors.
Purpose of the bill
The changes to Book 2 DCC have the purpose of protecting the position of creditors (joint or otherwise) in the event of a fast-track liquidation. The - temporary - measures will also increase the transparency of the procedure and be more effective in combating its abuse[2].
The purpose of the measures is, on the one hand, to make the procedure more accessible so as to meet the aforementioned need of entrepreneurs, and on the other hand to increase the confidence in this particular liquidation method. In the Explanatory Memorandum, the legislator earmarked as a desired result of the measures the possibility to retain this type of liquidation while enhancing the options of recovery for creditors whose interests have been prejudiced.[3]
Main points of the bill
The bill provides for strengthened accountability and disclosure requirements for the, present or former, directors of the wound-up legal entity, an addition to the existing director disqualification option , and an expanded right of inspection for creditors.
Element A: Directors' accountability and disclosure obligation
Article 2:19b(1) DCC (new) obliges the directors, current and former alike, to disclose the following documents in case of a fast-track liquidation.
- A balance sheet and a statement of income and expenditure for the financial year in which the legal entity was wound-up;
- A written statement describing the cause of the lack of assets and, if applicable, the reasons for leaving creditors unpaid;
- A description of the distribution of the proceeds prior to the wound-up; and
- The financial statements for the financial years preceding the year in which the legal entity was wound-up, if the statutory obligation to make these public has not yet been fulfilled.
The above documents must be filed with the trade register of the Chamber of Commerce within fourteen (14) days after the resolution to wind up the entity was taken. This accountability and disclosure obligation is applicable whether or not the wound-up legal entity leaves any liabilities behind.[4] Failure to comply constitutes an economic offence.
Element B: Director disqualification
The – temporary – measures of the bill provide the Public Prosecutor, in the event of (abuse of) the fast-track liquidation, for the possibility of seeking an order from the court to disqualify - current and former - director (or directors) in case of:
- not complying with the obligations referred to under Element A (obligations of accountability and disclosure), or
- personal culpability of the (former) director(s), or
- involvement within two years prior to the fast-track liquidation in the termination of at least two legal entities, either as director or directors, or as natural person or persons in the pursuit of professional or commercial activities.
If the entity has been declared bankrupt, the court may, at the request of the bankruptcy trustee or the Public Prosecutor, decide to disqualify a director if this director was involved in at least two (2) bankruptcies and/or liquidations of a legal entity in the three (3) years preceding the bankruptcy in question. The director disqualification can be requested by means of a regular civil-law petition[5] and the disqualification can be for up to five (5) years.[6]
Element C: Right of inspection
Creditors of a legal entity that has been wound up by the fast-track liquidation procedure obtain a right to inspect the books and records of that entity. This right may be exercised following an authorisation granted by the sub-District Court (Article 2:24(4) DCC - new). Giving creditors this right makes it easier for them to verify whether any irregularities occurred prior to the liquidation and/or whether the assets and liabilities of the legal entity were correctly realised and settled.[7] The creditor's request must be accompanied by a statement to the effect that the creditor has a reasonable interest in being granted the authorisation. A further condition for an authorisation is that the board of directors of the entity involved failed to fulfil the obligations of accountability and disclosure obligations (Element A).[8]
Temporary nature of the bill
The bill will initially be in effect for a period of two years, but it does provide for the option of becoming permanent - if certain conditions are met. One such condition is that the effects of the temporary measures need to be evaluated.
In conclusion
In short, the legislator has built several safeguards into the frequently used fast-track liquidation procedure, which entrepreneurs will be required to comply with. If you have any questions about ceasing activities as an enterprise, or if you are a creditor faced with a debtor fast-tracking liquidation, feel free to contact us.
[1] Parliamentary Papers, session year 2021/ 22, 36 172, no. 3, p. 2.
[2] Parliamentary Papers, session year 2021/22, 36 172, no. 3, p.2
[3] Parliamentary Papers, session year 2021/ 22, 36 172, no. 3, p. 7.
[4] Parliamentary Papers, session year 2021/ 22, 36 172, no. 3, p. 9.
[5] Parliamentary Papers, session year 2021/ 22, 36 172, no. 3, p. 23.
[6] Article 106b (1) of the Bankruptcy Act.
[7] Parliamentary Papers, session year 2021/ 22, 36 172, no. 3, p. 12.
[8] Parliamentary Papers, session year 2021/ 22, 36 172, no. 3, p. 27.