Legislative proposal Temporary Act Transparency Turbo-liquidation submitted to Parliament

August 5, 2022 | Blog

On 12 July 2022, the Dutch Minister for Legal Protection (the “Minister”) of the Ministry of Justice and Security submitted the legislative proposal Temporary Act Transparency Turbo Liquidation[1] (the “Proposal”) to the Lower House of Parliament. The Proposal regards a change of the existing procedure of the dissolution, at its own discretion, of a legal entity that has no assets (baten) at the time of dissolution. The proposed changes to current law comprise of an amendment of Book 2 of the Dutch Civil Code (the “DCC”), the Bankruptcy Act and the Economic Offences Act. In this Insight, we will discuss the amendments as laid down in the Proposal.

Current law

Under current law, Article 2:19(1)(a) through (f) DCC describes in which manners legal entities can be dissolved. Article 2:19(1)(a) DCC; provides that a legal entity becomes dissolved when its general meeting has passed a resolution for this purpose or, if the legal entity is a foundation (stichting), when its board of directors has passed such a resolution unless the articles of association of the foundation provide otherwise.

Furthermore, Article 2:19(4) DCC provides that if a legal entity no longer has any assets at the time of its dissolution, it will cease to exist automatically as of that moment. In such event, the board of directors must file notice thereof for entry in the Trade Register at the Dutch Chamber of Commerce. The application of Article 2:19(1)(a) DCC in conjunction with Article 2:19(4) DCC is called the ‘turbo liquidation procedure’.

Reason for Proposal

Since its introduction in 1994, the turbo liquidation procedure has been a popular instrument to dissolve a company. The main reason for this lies in the fact that the legal requirements that apply to the dissolution procedure of a legal entity that does have assets at the time of its dissolution (e.g. appointing a liquidator and preparing accounts and a plan of distribution) do not apply to the turbo liquidation procedure. As there are no assets to divide, the dissolution can be finalised more simply and swiftly. However and as will be pointed out below, this very feature can also be considered to be a weakness as it gives room for abuse.

In practice, a board of directors can work towards a situation that the legal entity no longer has any assets (but still liabilities). Once no assets are held, the legal entity can be easily dissolved without the board of directors having the obligation to answer to anybody. Theoretically, dividing the value of the assets among creditors at a moment that not all creditors can be fully paid may be unlawful and a source of liability of the relevant director towards the legal entity. This would constitute an asset (claim on the director) and the liquidation could be reopened by the court and the director could be liable. However, this can be difficult for creditors: they have to deal with the fact that a debtor (often unexpectedly) no longer exists. Furthermore, under current law creditors have no right to obtain information about how the legal entity ended up without any assets.

In 2019, the Minister addressed this issue and acknowledged that an improvement and, consequently, an amendment of current law was required. This resulted in a preliminary draft at civil service level (ambtelijk voorontwerp). However, the legislative process was discontinued in 2021 due to, inter alia, a lack of funds.

In 2022, the situation is different. According to the Explanatory Memorandum[2] (memorie van toelichting) (the “EM”), the desired improvement has become a matter of urgency as it is expected that the use of the turbo liquidation procedure will increase significantly in the near future. The government understands that a significant number of entrepreneurs, partly because of the economic effects of the COVID-19 pandemic, will use the procedure to terminate (as yet) their businesses.

Because the expected increase of the use of the turbo liquidation procedure is linked to the COVID-19 pandemic, a special budget has been made available as part of a support and recovery package. However, due to its nature, the package is only available for a period of two years. Consequently, the amendments contained in the Proposal will, in principle, only be effective for a period of two years.

Scope

The provisions regarding the dissolution of a legal entity are found in Title 1 of Book 2 DCC: the general provisions. Article 2:3 DCC lists the legal persons governed by private law, being (1) associations (verenigingen); (2) cooperatives (coöperaties); (3) mutual insurance companies (onderlinge waarborgmaatschappijen); (4) public limited liability companies (naamloze vennootschappen); (5) private companies with limited liability (besloten vennootschappen); and (6) foundations. The provisions of the Proposal that intend to amend Book 2 DCC will also form part of the general provisions. Therefore, they will apply to these legal entities.

The EM elaborates on the applicability of the director disqualification (bestuursverbod) as proposed in the Proposal (we will elaborate on the director disqualification below). It mentions that the director disqualification can be imposed on the legal entities mentioned above, as well as on the European company (Europese vennootschap) and the European cooperative society (Europese coöperatieve vennootschap). The reason for this is that the Dutch law provisions applying to the dissolution of the public limited liability company and the cooperative apply to the European company respectively the European cooperative society as well. In other words, the dissolution provisions of Title 1 Book 2 DCC apply, including the provisions of the turbo liquidation procedure. Therefore, the proposed director disqualification will also apply to these European legal entities. Further, a European Economic Interest Grouping (Europees economisch samenwerkingsverband) (an “EEIG”) that has its registered office in the Netherlands is also a legal entity under Dutch law. However, the dissolution provisions of the EEIG Regulation[3] apply to it. As Article 2:19(4) DCC is not applicable to an EEIG, the proposed director qualification will also not apply to an EEIG.

Accountability requirement

We will now discuss the amendments proposed in the Proposal. Firstly, the Proposal introduces an accountability requirement in the proposed Article 2:19b DCC. Paragraph 1 determines that if a legal entity is dissolved in accordance with Article 2:19(1)(a) DCC and ceases to exist simultaneously as referred to in Article 2:19(4) DCC, the board of directors must file the following documents with the Trade Register within fourteen days after the dissolution:

  1. a balance sheet and a statement of income and expenditure for the financial year in which the legal entity is dissolved and the previous financial year if at the time of dissolution for that year no annual accounts have been filed and published;
  2. a description of:
  3. the cause of the absence of assets at the time of the dissolution;
  4. if applicable, the manner in which the assets of the legal entity have been realised and the results have been distributed;
  5. if applicable, the reasons why a creditor or creditors have been left wholly or partially unpaid, and
  6. the annual accounts regarding the financial years preceding the financial year in which the legal entity is dissolved, if to that end an obligation to file and publish exists pursuant to Article 2:394(3) DCC, which obligation has not been met yet, in a particular case including the auditor’s statement, within the meaning of Article 2:395(5) DCC.
Duty of publication

Secondly, paragraph 2 of the proposed Article 2:19b DCC provides that the board of directors must inform the creditors of the legal entity (if any) immediately after the filings as mentioned in Article 2:19b(1) DCC have been made.

Director disqualification

Thirdly, the Proposal introduces a director disqualification (bestuursverbod). The proposed Article 2:19c(1) DCC provides that if a legal entity is dissolved in accordance with Article 2:19(1)(a) or (e) DCC and has ceased to exist simultaneously as referred to in Article 2:19(4) DCC, whilst one or more creditors have been wholly or partially unpaid, the court (rechtbank) can, at the request of the public prosecution service (openbaar ministerie), impose a director disqualification on the director (former directors included), if the director:

  1. has not filed the documents referred to in Article 2:19b(1) DCC (only applicable if the legal entity is dissolved in accordance with Article 2:19(1)(a) DCC); or
  2. purposefully, on behalf of the legal entity, has performed or failed to perform acts as a result of which one or more creditors have been prejudiced significantly; or
  3. in the two years preceding the dissolution, has been involved at least twice in a bankruptcy or termination of a legal entity pursuant to Article 2:19(1)(a) or (e) DCC, and he is personally to blame for this.
Bankruptcy Act

Fourthly, the Proposal envisages amending the Bankruptcy Act. In connection with the possibility of a director disqualification, the proposed Article 2:19c(2) DCC provides that certain provisions of the Bankruptcy Act relating to the director disqualification apply mutatis mutandis. Furthermore, the Proposal proposes to amend Article 106a(1) of the Bankruptcy Act in such manner that it includes a reference to the proposed Article 2:19c(1) DCC.

Right of inspection

Article 2:24(1) DCC provides that the books, documents and other data storage media of a dissolved legal entity must be kept for a period of seven years after the legal entity ceased to exist. Article 2:24(4) DCC provides that the competent subdistrict court (kantonrechter) can, upon request, authorise the parties specified in this article to inspect the books, documents and other data storage media.

Currently, creditors of a legal entity that is dissolved pursuant to the turbo liquidation procedure do not have a right of inspection. The Proposal addresses this by proposing to amend Article 2:24(4) DCC by adding wording reflecting that any creditor will have the right of inspection if the board of directors of the dissolved legal entity has not met its obligations under Article 2:19b(1) DCC (provided that the subdistrict court grants this authorisation).

According to the EM, giving creditors the right of inspection will enable them to form an opinion whether or not irregularities have occurred prior to the turbo liquidation procedure. Consequently, creditors can make a better judgment as to their legal possibilities in undoing any prejudice they have suffered.

Economic Offences Act

The final and sixth proposed amendment regards an amendment of the Economic Offences Act. Once the proposed Article 2:19b(1) DCC has come into effect, non-compliance will be punishable under the Economic Offences Act.

Transitional law

Essentially, the amendments contained in the Proposal will only apply to dissolutions of legal entities that occurred during the period the Proposal came into effect (technically speaking the Proposal then becomes an Act) up and to including the day the Act lapses.

Coming into force and lapse

According to the EM, the expected increase of the use of the turbo liquidation procedure will result in more cases of abuse. This makes it necessary to make the amendments to current law as contained in the Proposal at short notice.

Apart from Section V of the Proposal that contains the lapse provisions, the Proposal comes into effect on a date to be determined by Royal Decree. Its different parts or sections may come into effect at different times. As we mentioned, the amendments contained in the Proposal will, in principle, only be effective for a period of two years. Section V of the Proposal will come into effect two years after the date Article 2:19b DCC enters into effect.

Three months prior to Section V coming into effect, the Minister must send a report about the effect of the Proposal in practice as well as a point of view regarding the intent to a change of law to introduce the provisions of the Proposal permanently. If so, the coming into effect of Section V can be postponed for a maximum period of two years. If a new legislative proposal is submitted to the Lower House of Parliament, the postponement continues until this proposal has become an Act or is either defeated or withdrawn.

In summary

According to the EM, the Proposal aims to improve the trust in the turbo liquidation procedure by:

  1. increasing its transparency (by introducing the accountability requirement and the publication duty);
  2. improving the legal protection of creditors (by introducing the right of inspection); and
  3. countering the abuse of the turbo liquidation procedure more effectively (as a result of the set of proposed amendments).

Although the administrative burden for the board of directors of a legal entity increases through the introduction of the accountability requirement and the publication duty, the Proposal leaves the possibility of the turbo liquidation procedure intact.

 

[1] Tijdelijke wijziging van Boek 2 van het Burgerlijk Wetboek, de Faillissementswet en de Wet op de economische delicten in verband met het vergroten van transparantie bij de ontbinding van rechtspersonen zonder baten en de invoering in dat kader van de mogelijkheid van een civielrechtelijk bestuursverbod (Tijdelijke Wet transparantie turboliquidatie), Kamerstukken 2021-2022 / 36 172 nr. 2.

[2] Tijdelijke Wet transparantie turboliquidatie, Kamerstukken 2021-2022 / 36 172 nr. 3

[3] Council Regulation (EEC) No 2137/85 of 25 July 1985 on the European Economic Interest Grouping (EEIG), OJ 1985, L 199.

 

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