Bankruptcy fraud

Every year, without fail, there are many businesses that fall into bankruptcy. Becoming insolvent is a delicate issue. All eyes, and particularly those of the trustee in bankruptcy, are on the financial realisation, the priority being that the creditors of the business are paid what is due to them. In some cases, the tax authorities or the tax investigation service will also get involved. In our experience, it is not uncommon for businesses or managing directors to be accused of bankruptcy fraud because they are suspected of intentionally withholding information in the insolvency proceedings so as to short-change creditors. This accusation is definitely not always warranted.

Bankruptcy fraud

A typical example of bankruptcy fraud is when all valuable assets are withdrawn from the business, so that they cannot be sold and their proceeds will not go towards the creditors. Other examples of bankruptcy fraud are premeditated insolvency, selling items below market price or withdrawing assets from the bankruptcy estate to prejudice creditors. Disregarding the priority ranking of creditors may also qualify as bankruptcy fraud, as will failure to recognise income, causing documents or records to disappear or non-compliance with the rules of insolvency proceedings.

The trustee in bankruptcy plays an important role in administering a bankruptcy estate. In practice, it is usually the trustee who will report an instance of bankruptcy fraud to the Dutch Fiscal Information and Investigation Service (FIOD) or the Public Prosecution Service. If they believe that the suspicion of bankruptcy fraud is well-founded, they will initiate an investigation.

Criminal law

The Dutch Criminal Code has a number of provisions governing the criminality of bankruptcy fraud. Sections 340 and 342 of the Code, for instance, apply to natural persons and managing and supervisory directors; these sections use the term ‘eenvoudige bankbreuk’, which translates as culpable bankruptcy. This concerns excessive spending prior to the insolvency. It is irrelevant whether or not the spending was deliberate. In other words, the person doing the spending does not have to have had the intent to prejudice the creditors. It is fairly rare for persons to be prosecuted for this type of offence.

Sections 341 and 343 address ‘bedrieglijke bankbreuk’, which translates as fraudulent bankruptcy. This is considered a more severe offence because the judicial finding of fact requires a specific type of intent to prejudice creditors. This basically involves withdrawing assets from the bankruptcy estate, excessive spending or unlawfully favouring one or more creditors in any way. Intentional prejudice to creditors is also referred to as culpable prejudice. Section 194 of the Dutch Criminal Code sets out criminal provisions regarding non-compliance with the disclosure requirements during insolvency proceedings based on the Dutch Bankruptcy Act, while the provisions governing the enforcement of the record-keeping, retention and filing requirements are spread across different offence descriptions, for instance in Sections 344a en 344b.

Impact

Going through bankruptcy has a huge impact on the person or persons involved. The situation will only be exacerbated and become more complex if they are suspected of bankruptcy fraud to boot. Any suspicion of bankruptcy fraud should be reviewed with due care; the alleged perpetrator deserves active representation to gain control of their situation.

Please do not hesitate to contact us if you have any questions about forgery of documents. Our specialists are here to help.