Legislative proposal Temporary Act Transparency Turbo-liquidation
A legislative proposal called the Temporary Act Transparency Turbo Liquidation is being considered by the Lower House of Parliament in the Netherlands. This proposal aims to change the current process for dissolving a legal entity that has no assets at the time of dissolution (turbo liquidation). The new legislation would affect Book 2 of the Dutch Civil Code, the Bankruptcy Act, and the Economic Offences Act.
The current law, as outlined in Article 2:19(1)(a) through (f) of the Dutch Civil Code, allows for legal entities to be dissolved through a resolution passed by its general meeting or board of directors. Additionally, if a legal entity no longer has any assets at the time of dissolution, it will automatically cease to exist, and the board of directors must file notice with the Dutch Chamber of Commerce. This process, known as the ‘turbo liquidation procedure,’ has been widely used since its introduction due to its simplicity and speed, as it does not require the appointment of a liquidator or the preparation of accounts and a plan of distribution. However, this feature has also been identified as a potential weakness, as it allows for abuse by a board of directors who may aim to dissolve a legal entity without being held accountable. The proposal is being introduced due to the increased likelihood of turbo liquidations resulting from the economic effects of the COVID-19 pandemic.
The Proposal introduces several changes to the current law surrounding the dissolution of legal entities with no assets.
Firstly, the Proposal would add an accountability requirement in a new Article 2:19b of the Dutch Civil Code. This new article would require that, if a legal entity is dissolved according to Article 2:19(1)(a) DCC and simultaneously ceases to exist as outlined in Article 2:19(4) DCC, the board of directors must file the following documents with the Trade Register within 14 days of the dissolution:
- A balance sheet and a statement of income and expenditure for the financial year in which the legal entity was dissolved and the previous financial year, if annual accounts have not been filed and published at the time of dissolution.
- A description of:
- The cause of the absence of assets at the time of dissolution.
- The manner in which the assets were realized and distributed, if applicable.
- The reasons why a creditor or creditors were left wholly or partially unpaid, if applicable.
- The annual accounts for the preceding financial years, if an obligation to file and publish exists under Article 2:394(3) DCC, and this obligation has not been met yet and an include the auditor’s statement under Article 2:395(5) DCC
Secondly, the proposed Article 2:19b DCC would also require that the board of directors must immediately inform the creditors of the legal entity (if any) after the filings mentioned in Article 2:19b(1) DCC have been made.
Thirdly, the Proposal includes a new provision that would allow for the disqualification of directors in certain cases. Under the proposed Article 2:19c(1) of the Dutch Civil Code, if a legal entity is dissolved in accordance with Article 2:19(1)(a) or (e) DCC and has ceased to exist simultaneously as outlined in Article 2:19(4) DCC, and one or more creditors have been left wholly or partially unpaid, the court can, at the request of the public prosecution service, impose a director disqualification on the director (including former directors) if the director:
- Has not filed the required documents as outlined in Article 2:19b(1) DCC, if the legal entity is dissolved in accordance with Article 2:19(1)(a) DCC.
- Purposefully performed or failed to perform acts on behalf of the legal entity that resulted in significant prejudice to one or more creditors.
- In the two years preceding the dissolution, has been involved in at least two cases of bankruptcy or termination of a legal entity under Article 2:19(1)(a) or (e) DCC, and is personally to blame for these cases.
Fourthly, the Proposal also proposed amendment to the Bankruptcy Act, that the provisions of the Bankruptcy Act related to the disqualification of directors, will be applied in connection with the possibility of director disqualification.
Right of inspection
The Proposal also addresses the issue of creditors’ access to the records of a dissolved legal entity. Under current law, the books, documents, and other data storage media of a dissolved legal entity must be kept for seven years after the entity has ceased to exist. Creditors of a legal entity that has been dissolved through the turbo liquidation procedure do not have a right to access these records.
To address this, the Proposal proposes to amend Article 2:24(4) of the Dutch Civil Code by adding a new provision that would grant creditors the right to inspect the books, documents, and other data storage media of the dissolved legal entity if the board of directors has not fulfilled their obligations under Article 2:19b(1) DCC, and this authorization granted by the competent court. This would allow creditors to determine whether any irregularities occurred prior to the turbo liquidation procedure and make a better assessment of their legal options for reversing any harm they may have suffered.
The final proposed amendment in the Proposal concerns an alteration to the Economic Offences Act. Specifically, it would make non-compliance with the proposed Article 2:19b(1) DCC punishable under this act.
Coming into force
The Proposal has been introduced due to an anticipated increase in the use of the turbo liquidation procedure, which may lead to more cases of abuse. Therefore, it is deemed necessary to make the amendments to current law as outlined in the Proposal as soon as possible. The different parts of the Proposal may come into effect at different times, as determined by Royal Decree. However, in principle, the amendments will only be effective for a period of two years.
If you are planning to dissolve your entity in the near future, you should consider the implications of the Temporary Act Transparency Turbo Liquidation as it will be more complex and time consuming to dissolve a legal entity without assets as soon as the proposal is adopted.