If there are no longer any assets at all at a legal entity, a turboliquidation may take place. This is when a dissolution takes place without a liquidator being appointed. Recently, the North Holland District Court ruled on an issue in which a turboliquidation had taken place and a creditor (landlord) subsequently held that the directors were liable. We will first briefly explain what turboliquidation is and then discuss the judgment.
When turboliquidation?
As mentioned, a turboliquidation can take place when a legal entity no longer has any assets. Turboliquidation can also take place if the legal entity is still indebted to creditors. The legal regulation on turboliquidations was amended (temporarily) on 15 November 2023. Turboliquidations are still possible, but some additional formalities need to be observed.
If the legal entity still has assets and needs to be wound up then a liquidator needs to be appointed. If the liquidator finds that the debts are likely to exceed the assets, he must (in principle) file a bankruptcy petition. It is then up to a bankruptcy trustee to wind up the bankruptcy, including an investigation into legality issues.
If a legal entity has been terminated, it can be revived if the legal entity still has a potential benefit. You can read another article on our website about reopening the liquidation.
Turbo liquidation of catering business
The case that led to the court’s ruling involved the following. A catering business had started operations in early 2021, entering into a lease agreement with a landlord for the rental of the premises. Just under two years later, the management of the catering business decided to cease operations. The directors tried to sell the business, but were unsuccessful. As of 30 October 2023, the lease was terminated by 15 November 2023. However, this termination was not possible according to the lease.
The board led it to sell the available inventory. These proceeds have been divided among the creditors in proportion to their claims. The landlord was paid 4.76% of the assets present, amounting to €642.15. Subsequently, there were no more assets.
The landlord believes that wrongful acts were committed, holds the management of the catering business liable and starts proceedings to claim damages.
Directors’ liability in turboliquidation?
The landlord argues that the turboliquidation was unlawful and that an obligation to file for bankruptcy would not have been complied with. He points to the legal obligation incumbent on a liquidator to file for bankruptcy if debts exceed income. He further points out that he would have had an estate claim and a preferential position in bankruptcy.
The directors argue that there is no rule of law under which they were obliged to file for bankruptcy. The benefits were divided fairly among the creditors. The rule requiring a liquidator to file for bankruptcy did not apply because the company had ceased to exist by operation of law and no liquidation took place.
The court rejected the landlord’s claims and found in favour of the directors.
In doing so, it points out that directors’ liability in respect of detriment requires that a serious personal fault can be attributed to the director. The court points out that turboliquidation is possible and does not in itself lead to personal liability of the board. This was also the appropriate course of action, as there were no more assets. The provision on the obligation on the liquidator to file its own declaration of bankruptcy does not apply, as there was no liquidation (nor a liquidator).
Nor was there any unlawful selective payments. The small benefits were divided proportionally among the creditors. There was no question of the directors having favoured themselves or parties in which they have a personal interest. This conduct is still within the board’s policy freedom (even if that policy freedom is limited in insolvency). Thus, the directors cannot be seriously blamed for the landlord remaining unpaid.
Corporate and insolvency law lawyer
If you would like to know more about directors’ liability, winding up companies or reopening a liquidation, please contact Peter de Graaf of LVH Advocaten. The ruling discussed can be found here.
