Bankruptcy fraud and the trustee as police officer; the bill to strengthen the position of trustee

Whereas the fight against bankruptcy fraud is generally often portrayed in a negative light, last Monday, Feb. 24, 2014, Minister Opstelten (Security and Jusitie) showed with his bill "Strengthening the Position of Trustee Act" that the fight against fraud is indeed being considered in The Hague.

This bill was introduced as part of the legislative program "Recalibration of Bankruptcy Law." After the proposed introduction of the silent administrator and providing a legal framework for the pre-pack, it is now time to tackle bankruptcy fraud. Three measures have been devised for this purpose; previously known were the bills on the civil law ban on administration and the tightening of the criminal bankruptcy law and now, therefore, the strengthening of the position of the trustee when confronted with irregularities in a bankruptcy.

What changes for the trustee and the bankrupt?

Based on the Bankruptcy Act, the core task of the trustee is defined as the one in charge of managing and liquidating the bankruptcy estate. The bill first attempts to add to this task that the trustee dutifully investigates possible irregularities in the bankruptcy and reports to the bankruptcy judge. This is then not done in detail in a public bankruptcy report when the trustee is still investigating, but to the bankruptcy judge confidentially. The supervisory judge may then order the trustee to report to the competent authorities.

In itself, investigating irregularities is nothing new; a bankruptcy trustee could already hold a director liable for irregularities. To better assess whether bankruptcy fraud may have occurred, the information obligation of the bankrupt should be expanded. This is therefore the second change. There was already an obligation for the bankrupt to provide information at the request of the trustee, but the bill obliges the bankrupt to also provide the trustee with unsolicited information which he knows or should understand to be of interest to the trustee. This includes foreign assets or Swiss bank accounts. Incidentally, this duty already existed on the basis of case law, but now it gets a legal framework.

The question is how this duty will play out in practice, especially when it comes to information that might lead to the conclusion that bankruptcy fraud has occurred. For this, a trustee may have to make more frequent use of the possibility of requesting the court to place the bankrupt in insured custody in order to obtain the necessary information through a bankruptcy hearing, but this too was already possible and moreover, the Supreme Court recently ruled, not contrary to the rule that no one has to cooperate with his own (criminal) prosecution.

Regardless, the bankrupt must ensure, even more than now, that the trustee has (un)solicited all information necessary for its investigation. What is new, however, is that an obligation to cooperate also arises for third parties. In particular, actual and former directors must be able to provide information for a period of 3 years, during which they have been directors, before the date of bankruptcy.

Who is going to pay for that?

Investigations by the trustee into irregularities in a bankruptcy are primarily at the expense of the estate. The trustee is always paid for all his activities from the estate, i.e. by the creditors. If it actually comes to a report, the trustee receives a fee of 5 hours (based on the FIOD's fee rules). However, the bill creates the possibility of setting further rules when the trustee is ordered by the supervisory judge to file a report. This is particularly important when there is a so-called empty estate.

Conclusion

The receiver will increasingly have to put on the hat of the "sleuth" in the fight against bankruptcy fraud. In our opinion, the order to report bankruptcy fraud by order of the supervisory judge must therefore be followed by an obligation on the part of government agencies to give bankruptcy fraud reports the attention they deserve more than is currently the case. To this end, capacity and money will have to be made available at the Ministry of Security and Justice.

If you are a former director of a legal entity, at least make sure you are able to provide a trustee with information about your directorship. He might just ask for it if the legal entity goes bankrupt within three years of your departure!