Dear Weekender,
Financial difficulties rarely arise overnight. Most owners and managers do everything they can to keep things going, cutting costs, chasing sales, hoping next month will be the turning point. But what happens when things don’t turn around? At some point, the problem stops being just about money. It can also have serious legal consequences, including for directors personally.
When does a business go bankrupt?
A business goes bankrupt when it can no longer pay its bills and has no realistic way of doing so. Bankruptcy is aimed at liquidating the company’s assets for the benefit of its creditors. Once declared bankrupt, an independent trustee steps in to take over, sells off the company’s assets, and uses the proceeds to pay back as many creditors as possible.
A bankruptcy petition may be filed by the company itself (in Dutch: “eigen aanvraag”) by creditors (provided there are at least two creditors with due and payable claims) or, in exceptional cases, by the Public Prosecutor (very recently a Dutch Cryptocurrency platform known as ‘Knaken’ was declared bankrupt at the request of the Public Prosecutor).
Can you be held personally responsible?
One of the most common misconceptions is that if the company fails, directors are automatically protected. If you run a private or public limited company (a B.V. or N.V.), the company is generally responsible for its own debts, not the director (or shareholders) personally. But that protection has limits.
If you as a director or owner keep taking on new financial obligations (for example: ordering goods or borrowing money) at a time when you knew, or should have known, that the company had no way of paying for them, you can be held personally liable. That means creditors (or in case of bankruptcy: the trustee) could come after your own money and assets, not just the company’s.
This does not mean that directors must immediately file for bankruptcy when financial difficulties arise. The law allows directors to continue trading where there is a realistic prospect of recovery. However, once it becomes clear that the company is no longer viable, continuing to incur new obligations may expose directors to personal liability. Note that the tax receiver can in principle hold each of the directors liable for fiscal debts of the company (like wage tax, profit tax or TOT) that have materialized during their tenure as director.
Why a voluntary bankruptcy filing can make sense
For that reason, voluntarily filing for bankruptcy is sometimes the better option. Although it may feel like losing control, the opposite is often true. Directors who file for bankruptcy themselves generally have more influence over the process than those who wait until a creditor forces the issue.
Before a bankruptcy petition is filed, however, directors should ensure that the company’s internal decision-making requirements have been met. You will need the approval from your shareholders before you can go ahead.
Filing the petition yourself also allows you to ensure that the company’s affairs are in order before the bankruptcy trustee takes over. The financial administration and annual accounts can be brought up to date where necessary, outstanding matters can be completed where possible, and the company’s financial position can be presented clearly from the outset.
Just as importantly, acting in time demonstrates that the directors have taken the interests of creditors seriously once it became apparent that the business could no longer continue.
Do not overlook the administration
There is a good reason why directors should ensure that the company’s books and records are in order before filing for bankruptcy. Proper administration is not merely good business practice, it is a legal requirement.
Every company director is required by law to maintain accurate financial administration and to prepare annual accounts on time. If your business goes bankrupt and it turns out those records were not properly kept, the law presumes that the bankruptcy was partly caused by poor management. The burden then falls on that director (or directors) to prove that wasn’t the case. So if it comes to legal proceedings, they are starting at a disadvantage. Keeping the administration and annual accounts in order is therefore much more than an administrative exercise. It may ultimately prevent personal liability.
Is there an alternative?
Bankruptcy is not always the only route. If a business is basically sound but there is a struggle with a short-term cash flow problem, there may be a legal procedure that allows them to temporarily pause the payment obligations while they get back on their feet. We will explain that option in a future article.
Every business is different, and so is every financial crisis. Seeking legal advice at an early stage is often the best way to protect both the company and its directors.
Yours sincerely,
Stan van Liere en Hagir Naas | HBN Law & Tax
This email address is being protected from spambots. You need JavaScript enabled to view it., This email address is being protected from spambots. You need JavaScript enabled to view it.
