Scylla or Charybdis: Turboliquidation or your own declaration of bankruptcy?

The choice from the title of this blog continues to keep the mind. The wrong choice can lead to directors' liability, or an unnecessary bankruptcy behind your name. Good advice for liquidity problems is essential.

The District Court of Northern Netherlands considered on March 2: "#Turboliquidation is intended to allow a legal entity with #debt but no #assets to cease to exist quickly and easily. In case the company has no or almost no assets at the time of the (intended) dissolution and there is no reason for the expectation that assets can be generated in the #failure, the director SHOULD ALSO refrain from filing for bankruptcy (because otherwise he would abuse that power) and must dissolve without liquidation via the route of Article 2:19 paragraph 4 BW (HR 18 December 2015, ECLI:NL:HR:2015:3636)." (ECLI:NL:RBNNE:2022:870)

In my opinion, this stems from a misreading of the Hoeksma qq / RM Trade judgment. There it was ruled that if a legal entity has been declared bankrupt on its own initiative, the trustee - on its own account - is to be regarded as an interested party within the meaning of Article 10, paragraph 1 of the Bankruptcy Act and can file an opposition against the declaration of bankruptcy, if it does so on the ground that the estate contains (virtually) no income and also no income can be obtained or otherwise expected.

In the case of a declaration of bankruptcy pronounced on a legal entity's own initiative, the objection only qualifies for validation if there is an estate that contains (virtually) no assets and there is no reason whatsoever to expect that assets can be generated in the bankruptcy, for example with the application of Article 42 Fw or Article 2:9 BW (#pauliana or #directors' liability).

A misreading, because rejecting a bankruptcy filing in advance (for abuse of rights) is different from declaring bankruptcy and then - after investigation by the trustee - concluding that opposition is well-founded.

I find a good supporter in A-G Timmerman: "The practice in which the petition for bankruptcy is immediately dismissed on one's own initiative is, in my view, at odds with the requirement (from the 1974 and 2000 judgments) that the trustee has completed a sufficiently thorough investigation of the state of the estate. I therefore consider this practice to be wrong in principle."

He continues: "The fact that this case, unlike the Supreme Court rulings of 1974 and 2000, concerns a self-filed bankruptcy, is in my opinion irrelevant in this respect (...). Also in the case of a self-filed bankruptcy case, it is the trustee in bankruptcy who has to (further) investigate the state of the estate and in doing so, among other things, has to investigate whether there is a director's liability. The statements of the director cannot therefore be relied upon just like that. The situation is different if the trustee opposes a declaration of bankruptcy, as is the case here. After all, in that case a trustee is involved."

The Supreme Court adopts this (implicitly): "At the time the opposition is considered, therefore, the outcome of that investigation should be available."

Without a declaration of bankruptcy (because of rejection of the petition to do so), that investigation will not come at all, and I think that is wrong: the creditors are therefore - I wrote it before - "entitled" to such an investigation.

As I previously annotated under JOR 2018/108, I hope that an abuse of rights will no longer be easily assumed in own declarations of bankruptcy. And that such a consideration as that of the District Court of Northern Netherlands will also become a thing of the past.

Meanwhile, the new Temporary Law on Transparency Turboliquidation is awaited. This significantly improves the position of creditors. It introduces a financial accountability and disclosure obligation for directors. The consultation round for the law already closed in July 2021, but the effective date is unfortunately still unknown.