What to do when a company is in financial difficulties, and who is responsible for taking which actions?
Conclusion
For entrepreneurs with a private limited company (BV), the board determines the course of business and manages the assets as long as bankruptcy has not been declared. If the BV is declared bankrupt, the trustee will assume effective control of the estate, and the board will lose its power to dispose of the company’s assets, although certain formal management powers will remain. Directors must prioritize the company’s interests, give extra weight to the position of creditors, and avoid any appearance of a conflict of interest. Irresponsible distributions – such as dividends – can lead to personal liability. The general meeting retains its core powers, but temporary restrictions on rights such as pre-emptive rights or profit sharing may apply for emergency financing. If bankruptcy is imminent, a designated trustee can be appointed to explore solutions before bankruptcy and, if that proves unsuccessful, to prepare for the bankruptcy in an orderly manner.
When a BV faces financial pressure, tasks and powers can shift between the corporate bodies – where the law and articles of association allow. In this article, we explain what this means for the board, the shareholders’ meeting, and the (proposed) trustee.
The Board
Outside bankruptcy, the board represents the BV, determines its strategic direction, and manages the company’s assets. Once the BV is declared bankrupt, the trustee acquires exclusive management and disposition powers over those assets. The board formally retains other powers, but in practice loses control over the estate.
Directors must act in the best interests of the company and its business. If there is a personal conflict of interest, they refrain from decision-making. In financial difficulties, the board weighs the interests of creditors more heavily, as the risk increases that outstanding obligations cannot be met on time. Be cautious with distributions, such as dividends: if directors know or should have known that the BV will no longer be able to pay its outstanding debts after a distribution, liability for improper performance of duties may follow. In that case, directors can even be held jointly and severally liable for the deficit in the company’s assets caused by the distribution. This also applies to entering into any obligation that the board knows or should know cannot be fulfilled.
The Shareholders’ Meeting
The general meeting has, in principle, the authority to appoint and dismiss directors, amend the articles of association, approve the annual accounts, and decide on dissolution, mergers, demergers, and conversions. In addition, the general meeting has information rights vis-à-vis the board and, within the limits of the law and the articles of association, exercises all powers not assigned to other bodies. As a corporate body, the general meeting acts in accordance with the corporate interest, bounded by reasonableness and fairness.
Individual shareholders retain, in principle, their voting rights: the right to attend meetings, the right to set agenda items, the right to convene meetings, and the right to vote. In acute financial situations, certain rights can be temporarily set aside to enable necessary financing, for example, the pre-emptive right in a share issue or the right to profit distribution.
The Advisor and the Trustee
When bankruptcy is imminent, it may be important to appoint an advisor or lawyer to help prevent or prepare for it. Where possible, they will explore solutions outside of bankruptcy together with the board to stabilize or restructure the company. If a sustainable solution proves unfeasible, this advisor will prepare the bankruptcy proceedings.
Once bankruptcy is declared, the trustee administers and liquidates the estate, takes effective control of the assets and the settlement, and investigates whether any irregularities have occurred that caused or exacerbated the bankruptcy, complicated the liquidation, or increased the deficit. From that point on, none of the bodies within the company have any power of disposition. It is therefore important to arrange matters properly (well) before bankruptcy, if that is deemed desirable.
