15.2.2 Is the current Book 2, Section 19(4) of the Dutch Civil Code a well-considered provision?

The present research has shown that the current Book 2, Section 19(4) of the Dutch Civil Code is not a full and correct basis for the turbo-liquidation as a method of dissolution. It follows from the literal wording of Book 2, Section 19(4) of the Dutch Civil Code that, in order to dissolve a private company by means of the turboliquidation, only one condition needs to be met: the absence of assets at the time of dissolution. As a result of this it could be concluded that it is possible to dissolve a private company with liabilities alone by means of the turbo-liquidation.

When the prevailing doctrine is that a private company with no assets but with liabilities may, or even must, undergo the turbo-liquidation, this has major consequences for two groups of stakeholders. First of all it is highly likely that private company fraudsters will take advantage of this. If they divert all the assets out of a private company and build up a large debt, they will no longer become insolvent, but the company can be dissolved cheaply and quickly under Book 2, Section 19(4) of the Dutch Civil Code. This has various advantages for fraudsters. When the company is dissolved by means of the turbo-liquidation, it immediately ceases to exist; no winding-up takes place. As a result no insight is obtained into the company’s accounts and finances. If the company were unable to take advantage of the turboliquidation, but is adjudicated insolvent, this would be quite different. In insolvency the receiver looks for any acts of fraudulent conveyance that often underlie the path to the turbo-liquidation. Fraudsters will deliberately put the company’s assets beyond the reach of (certain) creditors, for example by means of selective payments. The receiver also investigates whether there is any question of directors’ liability, of which there is a good chance in the case of a fraud scheme. Directors’ liability may exist under Book 2, Section 248 of the Dutch Civil Code, under which the failure to comply with the obligation to prepare annual accounts and/or the requirement to keep records leads to the conclusion of improper administration. The failure to declare a liquidation order on time may also give rise to improper administration. Directors’ liability may also exist under Book 6, Section 162 of the Dutch Civil Code when in the phase before the dissolution resolution acts are performed by which the interests of the creditors are ignored. Finally, it is conceivable that the receiver calls directors to account on the grounds of harmful, deficient administration under Book 2, Section 9 of the Dutch Civil Code. In my view fraudsters – when it is possible to turbo-liquidate a company with liabilities – are encouraged to divert assets from companies, to build up a large debt and to dissolve the company under Book 2, Section 19(4) of the Dutch Civil Code, as a result of which the risk of directors’ liability is largely mitigated.

If fraudsters operate in this way, creditors are the victims. Following the turbo-liquidation, the company ceases to exist, so that the creditors’ claims remain unpaid. The only option open to the creditors is a claim to reopen the winding-up proceedings under Book 2, Section 23c(1) of the Dutch Civil Code. However, this does not provide sufficient protection to creditors against fraudulent schemes.

The parliamentary history shows that the turbo-liquidation was introduced for situations in which companies have no assets at the time of dissolution. The subject of the Act by which the turbo-liquidation option was introduced was the introduction of the possibility of dissolution by the Chamber of Commerce (Book 2, Section 19a of the Dutch Civil Code). The underlying thinking of the Minister in this regard was – in part – preventing misuse of shell companies. Nothing was said about the existence of liabilities at the time of dissolution. It therefore seems to follow from both the parliamentary history and the literal legal wording of Book 2, Section 19(4) of the Dutch Civil Code that the turbo-liquidation can be used when a private company has liabilities (provided that the company no longer has any assets at the time of dissolution). In view of the underlying thinking of the Minister at the time of the legislative change, it is very unlikely that the legislature introduced the turbo-liquidation for the situation in which a company only has liabilities at the time of dissolution, especially in view of the drawbacks of this approach set out above. Misuse of private companies is therefore as it were promoted in this way, while the underlying thinking of the Minister at the time of the legislative change was in part preventing misuse of shell companies. In my view the turbo-liquidation option is therefore only intended for the situation in which a private company has neither assets nor liabilities at the time of dissolution.