Personally liable for the shortfall in liquidation assets

Two acquaintances went about making a dream come true. They invested in a well-known catering establishment. One as the shareholder, the other as shareholder-director. Aside from visiting catering establishments, they had no experience in the sector.The purchase price had been determined by the catering estate agent, and this particular place of entertainment was popular. It had to be a success. But alas… the number of visitors to the establishment proved disappointing, staff costs doubled, margins shrank, and the branch managers had other interests. As a result, ‘the dream’ had become a costly nightmare.Liquidation was the only option. The management opted for an out-of-court settlement, but had misunderstood some aspects such as the statutory order of priority of creditors. An application for bankruptcy was filed and the director was held personally liable for the entire shortfall in the liquidation assets, totalling some 1.5 million euro.

Our assignment

Hoens & Souren were engaged by the accused director of the bankrupt catering establishment. Our assignment was to keep losses to a minimum. The trustee in bankruptcy claimed that the accused had acted fraudulently in respect of creditors (actio pauliana). He also claimed there was clear evidence of mismanagement, as the accounts were not in accordance with Book 2, Article 10 of the Dutch Civil Code, and because payments had been made selectively. Our client was robbed and stripped of his assets, and had had the best intentions even during the liquidation, but in legal terms, our client’s prospects did not look good.

Our approach

We studied the case dossier and it was decided in consultation to focus on the liquidation process and how the creditors with different ranking orders and rights had been disadvantaged. We further studied the hypothetical situation as to what might have happened if management had not wound up the enterprise, but a trustee in bankruptcy had been appointed. The law court accepted this argument and urged the parties to reach a settlement.

The result

The substantive issues in law and the question whether or not our client was liable for the shortfall in assets no longer arose. And perhaps just as well.