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Insolvency fraud strategy can benefit from guidelines for liquidators

The liquidator is, according to the law, the initial designated person to signal and address irregularities in insolvencies. But when tackling fraud costs more than it generates, what does that mean for the liquidator’s course of action? And which factors obstruct liquidators in addressing these irregularities? PhD defence on 27 September 2022.

Thousands of companies are declared bankrupt in the Netherlands each year. In approximately 25 percent of the cases, irregularities occurred in their insolvency settlement. This results in societal damages of over a billion euros per year. Under current legislation, the liquidator, assigned by the courts to oversee the liquidation of the estate, is the first person to identify and address irregularities. 

Jessie Pool

The law assumes that tackling irregularities is also in the interest of the creditors, says Jessie Pool, PhD candidate at the Institute for Private Law. ‘But sometimes the inquest into irregularities costs more than it generates. The costs are deducted from the estate assets that remain available for the joint creditors. Critics claim that, as a result, the liquidator is not always very eager to address irregularities prior to and during the liquidation process.’

Fascinated by this difference between legislation and practice, Pool decided to focus on how liquidators deal with the ambitions of the legislator to curb irregularities in insolvencies for her PhD thesis. To gain insight into the way liquidators operate, Pool conducted a qualitative interview study among 33 Dutch liquidators. ‘I asked them about the way they approach addressing irregularities. I also conducted a document analysis based on 2,134 insolvency reports. I looked at the degree in which the options for redress coincided with the decision of the liquidator to resolve irregularities. I also conducted an extensive survey study involving Dutch liquidators, of whom 177, approximately 30 percent of all liquidators in the Netherlands, responded.'

Varying methods

Research shows that there is not a consistent approach among liquidators on addressing irregularities. Liquidators have widely differing approaches and disagree among themselves on the ways in which to address irregularities. Pool has identified two groups of liquidators of similar size: on the one hand, a group that does not necessarily see addressing irregularities as part of their job and only does so if it is in the interest of the joint creditors, if it generates net proceeds for the estate. On the other hand, a group that sees addressing irregularities as an integral part of their tasks and also tries when this is not necessarily in the interest of the joint creditors, if it results in a reduction of the estate. 

Pool also states that the chance that irregularities will actually be addressed depends on three dimensions. First of all, the chances that irregularities are addressed depends on the financial status of the estate. When, after deducting costs of tackling irregularities, there is insufficient estate to partially or fully compensate the creditors and the cost of addressing irregularities outweigh the benefits, the liquidator will be less inclined to address the irregularities. When there are no means in the estate, the liquidator will also not receive any compensation for their work. 

The defence ceremony of the PhD thesis by Jessie Pool will take place on Tuesday 27 September at 16.15 hours in the Academy Building in Leiden. 

Secondly, the chance that irregularities will be addressed depends on the person of the liquidator. Liquidators who believe that combatting fraud is part of their function or who have positive experiences reporting fraud, will be more inclined to address irregularities. It was also shown that liquidators who are running a profitable practice, in light of the financial dependency of the revenue of the estate, are more inclined to tackle irregularities. So, it is possible that in a similar situations one liquidator would be more inclined to tackle irregularities, while another would be less so. 

Thirdly, the chance of irregularities being addressed also depends on the relation of the liquidator with the supervising court and its examining magistrates, as liquidators depend on that court for their appointments. The more value the supervising court places on tackling irregularities, the more likely the liquidator will be to address irregularities. 

Adequate compensation

In her dissertation Pool makes recommendations to facilitate and encourage liquidators to address irregularities. ‘I propose, for instance, to provide adequate compensation for the activities that are required in the process to prevent a lack of sufficient financial means in the estate and a difficult or lacking means of redress becoming an obstruction for liquidators to address irregularities. I also see possibilities to facilitate liquidators by putting less emphasis on a purely efficient and expedient settling of insolvencies by the supervising court.’ And, finally, Pool argues for guidelines to limit the policy freedom of the liquidator when tackling irregularities. In order to minimize the difference in approaches by liquidators while tackling similar irregularities. A consist approach to irregularities also requires a clear choice for one of the two of the perceptions of duties with which liquidators conduct their business in this terrain. Organisations such as INSOLAD and ReCoFa should implement a code of conduct for liquidators, ensuring that the strategies for addressing irregularities during insolvency settlements become more transparent for everyone involved: liquidator, creditor, and debtor. 

Pool hopes that her research will lead to more transparency regarding the problems that occur during insolvency settlements. ‘In the media, liquidators are often portrayed as ‘money grabbers’ because their salary is paid at the expense of the reimbursement of the creditors. I have problems with that image, especially because there is a large number of insolvencies where there is no money available in the estate and the legislator basically expects that liquidators do their work for ‘free’. The results of my research should be cause for the legislator to look into alternatives for financing empty estates and the payment of salaries for liquidators and where possible support them in fulfilling their ambition.’

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