Turbo liquidation a special method (English)

In the Netherlands it is possible to dissolve a Dutch limited liability company with no assets but only liabilities.[1] This method of dissolving a corporation is called turbo liquidation, and it is made possible by the Dutch corporate law. In practice the shareholders make the decision to dissolve the corporation, on advice of the board of directors, and afterwards the board of directors need to submit a form from the Chamber of Commerce. This form will result in the removal of the corporation from the trade register. It is important to note that the board of directors do not have to consult the creditors about dissolving the corporation.[2] Therefore, this is a difficulty for the creditors because the creditors are left behind with their claims on a non-existent corporation without knowing that the corporation is dissolved. In some cases a corporation with assets gets dissolved by turbo liquidation. This is possible because the Chamber of Commerce does not check the corporation’s records. In this case it is unsure if the corporation still exists or is dissolved. In the literature there are three different views about if a corporation still exists or is dissolved after turbo liquidation. In the first view, the authors argue that it is not necessary to “revive” the corporation before suing the corporation.[3] In the second view, the authors argue that it is necessary to “revive” the corporation before suing the corporation[4]. Lastly, in the third view the author has combined both views, because she argues that both views do not lead to the desired result.[5] In the next paragraph there will more background information about the issue and afterwards the three different views will be discussed in more detail. Next there will be discussed why the first view needs to be preferred in all situations for the sake of the creditors, and in the last paragraph there will be a conclusion.

Background information

The discussion whether the corporation needs to be “revived” before it can be sued, after being dissolved, finds its origin in the Dutch Civil Code. Article 2:19 subparagraph 4 Civil Code states that a corporation with no assets but only liabilities can be dissolved and article 2:19 subparagraph 5 Civil Code, on the other hand, states that a corporation is still existing after being dissolved if the corporation still has assets. So in the situation that a corporation with assets get dissolved by using turbo liquidation, it creates friction between those articles. In the first view the authors argue that subparagraph 5 prevails over subparagraph 4 and in the second view the authors argue the opposite. In the third view the author argues that subparagraph 5 prevails over subparagraph 4 if the board of directors did not know that the corporation still had assets, and subparagraph 4 prevails over subparagraph 5 if the board of directors knew that the corporation had assets. Nevertheless, all authors agree about the existence of the dissolved corporation and that it is not necessary to “revive” the corporation in the following situations. Firstly, if the corporation is involved in a legal procedure, then it is not necessary to “revive” the corporation if the corporation gets dissolved before the judge hands down the verdict.[6] Secondly, if a corporation with a negative asset gets dissolved then it is also not necessary to “revive” the corporation because this situation creates a socially unacceptable situation.[7]

The core of the three views

In the first view subparagraph 5 prevails over subparagraph 4 of article 2:19 of the Civil Code. This view finds most of its support from case law.[8] In this approach of the issue the discretion of the board of directors to dissolve the corporation is important. The reason behind this is because the highest court in the Netherlands ruled that the judgement of the board of directors on whether the corporation still has assets can be reviewed by a judge.[9] The authors conclude from this verdict that a corporation can be sued before being “revived”. This view is clearly in favour of creditor protection because it saves creditors from an additional procedure to sue the corporation.

The second view gets less support from the literature and case law. Some authors and the court in Arnhem get their support from the Parliamentary history of book 2 from the Civil Code. In the Parliamentary history states that the legislature wanted to have no doubt about the existence of a corporation because uncertainty about that subject is unacceptable for legal security.[10]  Therefore, this view places legal security in first place and creditor protection is less important than in the first view.

In the third view the author argues that the first and second view do not lead to a desired result in all situations. Therefore, the author created her own view. As mentioned earlier the author argues that subparagraph 5 prevails over subparagraph 4 if the board of directors did not know that the corporation still had assets, and subparagraph 4 prevails over subparagraph 5 if the board of directors did know that the corporation had assets. This view is based on the author’s view on turbo liquidation which she created during her PhD-research. Therefore, this view is not ‘yet’ supported in case law. In the situation that the board of directors deliberately uses a turbo liquidation unlawfully the author puts creditor protection in first place. However, when the board of directors are unknowingly using the turbo liquidation unlawfully the author puts legal security in first place.

Preferred view

Creditor protection should be the number one priority in case a corporation gets dissolved by using turbo liquidation. Imagine that a creditor gets confronted with a dissolved corporation which unlawfully used turbo liquidation to dissolve. It used unlawfully turbo liquidation because it still had assets. In this situation the creditor is left behind with a claim on a non-existent corporation, and the creditor did not even know about fact that the corporation would dissolve. It would be strange if a creditor should first “revive” the corporation before suing the corporation. If that would be the case, a creditor gets indirectly punished because a corporation used turbo liquidation unlawfully. Therefore, the second view is unreasonable against creditors. Legal security still is important in many aspects of law, but in this case creditor protection should prevail over legal security. The reason behind this is because the creditors are placed compulsory in a weak position and the law should protect weaker parties against exploitation. The third view tries to find a reasonable medium by linking different effects to different causes. The problem with this view is that subparagraph 4 prevails over subparagraph 5 of article 2:19 Civil Code if the board of directors did not know about the asset. This is a problem because a creditor cannot determine whether the board of directors knew about the asset. It is impossible for them to disprove this statement of the board of directors because outsiders cannot obtain the necessary information to disprove this statement. Therefore, the first view must be preferred because it should be possible in every situation to have a court judge the decision of the board of directors without having to “revive” the corporation first.

 Conclusion

The legislation on turbo liquidation needs to be revised in order to protect creditor’s rights. There are three different views on the issue whether a corporation with assets should still exist or should be dissolved after using turbo liquidation. Proponents of the first view conclude from a verdict that a corporation can be sued before being “revived”, after using turbo liquidation, because the highest court in the Netherlands ruled that the judgement of the board of directors on whether the corporation still has assets can be reviewed by a judge. In contrast, proponents of the second view argue that the legislature wanted to have no doubt about the existence of a corporation. Therefore, a corporation which has used turbo liquidation needs to be “revived” before it can be sued. In the third view, the outcome on whether a corporation needs to be “revived”, depends on whether the board of directors deliberately has used a turbo liquidation unlawfully. All three views have their strengths, but the first view needs to prevail because creditor protection should be the number one priority in case a corporation gets unlawfully dissolved by using turbo liquidation. Legal security is essential for a society, but should not prevail over creditor protection in such a delicate situation. The law should protect weaker parties against exploitation, and in these situations the creditors are the weaker parties that needs protection. The creditors are in such a bad position that it is even very unlikely that they can get their claim paid even if they can sue the corporation. Therefore, it should not be made more difficult for creditors who try to get their claim paid.

A solution to preventing these situations from happening, could be to change article 2:19 subparagraph 4 Civil Code. If it would be impossible for corporations with debt to use turbo liquidation, there can be no creditors who get exploited by this method of dissolving a corporation. Another solution could be to extend the power of the Chamber of Commerce. If the Chamber of Commerce needs to check the corporation’s records, there would be a smaller chance that the board of directors diverts assets of the corporation in order to use turbo liquidation. These solutions could solve the current problems that creditors face when a corporation gets dissolved by using turbo liquidation.

[1] Article 2:19 subparagraph 4 Civil Code.

[2] Rb. Middelburg (ktr.) 1 februari 2012, ECLI:NL:RBMID:2012:BV3422 (wenk).

[3] P. van Schilfgaarde, Van de BV en de NV, Deventer: Kluwer 2013 p. 396.

[4] Snijders-Kuipers, Groene Serie Rechtspersonen, art. 2:19 BW, aant. 8, Deventer: Kluwer 2012.

[5] S. Renssen, ‘De turbogeliquideerde BV die na ontbinding blijft voortbestaan’ Ondernemingsrecht 2015/8.

[6] Rb. Haarlem 18 juli 2007, ECLI:NL:RBHAA:2007:BB2280.

[7] Rb. Groningen 5 augustus 2011, ECLI:NL:RBGRO:2011:BR4855.

[8] HR 14 juni 2013, ECLI:NL:HR:2013:BZ4096.

[9] HR 27 januari 1995, ECLI:NL:HR:1995:ZC1631.

[10] Rb. Arnhem 27 september 2005, ECLI:NL:RBARN:2005:AU5572.

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