How can a legal entity be terminated?
1. Dissolution and liquidation
Dissolution and liquidation occur in cases where a legal entity has positive assets. Liquidation is a statutory and safeguarded procedure in which a liquidator liquidates the assets of a legal entity in a manner transparent to creditors. The proceeds are then distributed to creditors according to the legal order of priority.
2. Filing for bankruptcy
A director may also choose to file for bankruptcy of the legal entity. To do so, the legal entity must be in the condition where it has ceased to pay. The legal entity must have at least two creditors, one of whom must have a claim that is due. The purpose of bankruptcy is to liquidate the legal entity's assets and distribute the proceeds to the creditors.
If there are no assets to distribute, filing one's own bankruptcy is not the appropriate way of terminating the legal entity. If a director knows that there are no assets, but still files his or her own bankruptcy of the legal entity, this may even result in director liability.
3. Turboliquidation
If a legal entity runs out of assets, then there are no more assets to liquidate. In that case, turboliquidation is generally the most appropriate way to terminate. Turboliquidation is carried out by passing a resolution of dissolution by the board or the general meeting of shareholders (AGM). Through this decision, the legal entity immediately ceases to exist. Following the dissolution decision, the dissolution must be notified to the Chamber of Commerce.
From November 15, 2023, there are a number of new obligations for directors that they must follow up on after the dissolution decision: the filing obligation and the disclosure obligation. These are further explained in the section "Obligations for directors after the introduction Temporary Act on Transparency Turboliquidation".
Advantages of turboliquidation
Turboliquidation is a relatively quick, simple and inexpensive way to dissolve an empty legal entity. A legal entity can be wound up quickly without the need for liquidation proceedings. This saves costs and the process can be completed in a very short time.
The vast majority of legal entities are terminated this way. In 2022, some 50,000 legal entities were terminated. In over 90% of cases, this was done through turboliquidation.
Disadvantages of turboliquidation
The advantages of turboliquidation are offset by a number of disadvantages that a director must be mindful of.
- In the event that assets are subsequently found to be present, this may result in a liquidation procedure still having to be followed. In that case, the legal entity revives (but remains dissolved) for the purpose of winding up. If, during the liquidation, it turns out that the assets are too little to satisfy all creditors, the legal entity will still have to file for its own bankruptcy.
- Under certain conditions, even after dissolution by turboliquidation, a creditor can file for bankruptcy of the legal entity. To do so, the creditor must be able to make a plausible case that there are still benefits.
- There is a risk of personal liability of the director if the turboliquidation is used for improper purposes or if the turboliquidation is not carried out according to the legal requirements. Since Nov. 15, 2023, there is additionally a risk of being banned from management if directors violate certain obligations in effect since Nov. 15, 2023. In addition to the board ban, violating these filing obligations may constitute a criminal offense by the directors. These risks, and how to avoid them, are explained in more detail in the section entitled "Risks in turboliquidation.
Obligations for directors after introduction Temporary Act on Transparency Turboliquidation
With the introduction of the Temporary Act on Transparency Turboliquidation, a number of new obligations have arisen for directors. Article 2:19b of the Civil Code establishes the filing and disclosure obligations for directors.
Filing requirement
The filing requirement means that within 14 days of registration of the dissolution, a:
- balance sheet and statement of income and expenses for the year of dissolution plus the previous year,
- A description of the cause of the lack of assets, the manner of realization of the assets plus distribution of the proceeds, and the reason why certain creditors remained wholly or partially unpaid; and
- the annual accounts for the financial years preceding the year of dissolution, insofar as they have not yet been filed, including an auditor's report where applicable.
For the filing of the documents mentioned in (ii) above, it is important for the director to know that merely establishing that there is no more money in the legal entity is not sufficient to satisfy the statutory description of the cause of the absence of income. This requires more explanation by the director.
In addition, in order to define the method of monetization, the entire period of settlement must be involved. Thus, it is important to be complete and transparent about the course of the turboliquidation.
Notice requirement
The associated duty of disclosure under paragraph 2 of Article 2:19b of the Dutch Civil Code means that after the documents referred to above have been filed, creditors must be notified of the filing without delay - that is, without any delay. Thus, immediately after filing the documents, the director must inform his creditors in writing that the documents have been filed and where the creditors can consult these documents.
Risks in turboliquidation
When turboliquidation is carried out carefully and in accordance with the rules, the likelihood of problems afterwards is small. After all, turboliquidation is, at its core, a proper way for legal entities without assets to cease to exist.
Nevertheless, there are a number of potential pitfalls and risks to consider. These relate in particular to the violation of the newly introduced obligations including the filing and disclosure requirements.
Administration ban
First of all, Article 2:19c of the Dutch Civil Code introduces a management ban. A management ban means that the director cannot be appointed as a director or supervisory director for a maximum period of five years, to be determined by the court.
If there has been a dissolution by turboliquidation in which one or more creditors have remained unpaid and one or more of the following conditions have been met, the director risks an administration ban if:
- The director failed to comply with the filing and disclosure requirements; or
- the director has deliberately acted or omitted to act in a manner that has materially prejudiced one or more creditors; or
- in the two preceding years the director was involved at least twice in a bankruptcy or a turboliquidation in which one or more creditors remained unpaid and he was personally blamed for this.
An administrative ban is issued by the court at the request of the public prosecutor.
Criminal
In addition to the management ban, a criminal offense has also been introduced in the Economic Offenses Act for violating the duty to file. Violation of the obligation to file by directors may thus constitute a criminal offense. This refers to violation of the obligations of Article 2:19 paragraph 1 of the Civil Code. The penalization refers only to the obligation to file. Violation of the disclosure obligation is therefore not punishable.
This does not alter the fact that a breach of the duty of disclosure may, however, weigh in, for example, possible civil proceedings brought against the management board by creditors who feel aggrieved by the turboliquidation. More on this in our next blog on the creditor's position in turboliquidation.
Unlawful selective payment
A final risk that directors should be aware of is the prevention of unlawful selective payments prior to the turboliquidation. By this we mean that the director, using the last financial resources of the company, deliberately pays certain debts in order to make the benefits disappear. Such a selective payment unlawfully violates the equality of creditors and disadvantages unpaid creditors. This may be a basis for director liability.
In conclusion
The Temporary Turboliquidation Transparency Act creates several changes that may impact your choices as a director whether or not to engage in turboliquidation. Despite the new obligations for directors in turboliquidation, turboliquidation may still be the best option to terminate the legal entity. Proper preparation and advice is essential here.
