Bankruptcy fraud: how to recognise and prevent it

What is bankruptcy fraud?

In bankruptcy fraud, an entrepreneur makes their company go bankrupt. For example after they have deliberately incurred debts. Another example of bankruptcy fraud is if an entrepreneur keeps certain assets or money secret when they declare bankruptcy, so they do not have to pay their creditors. Bankruptcy fraud is punishable by law.

How to recognise bankruptcy fraud 

Recognising bankruptcy fraud is difficult. You can keep an eye out for signals that indicate financial problems and possible imminent bankruptcy. Examples of such signals include:

• High staff turnover: the company you are dealing with keeps hiring new employees, who leave after a short period.
• Irregular orders: the customer suddenly buys less or more than usual.
• Irregular payments: the company you are trading with wants to delay payments.
• Avoidance behaviour: you can no longer reach the business.

Prevent problems and take timely steps if your customer does not pay your invoice.

Examples of bankruptcy fraud

How does bankruptcy fraud work? There are several types:

Favouring creditors

Sometimes, just before the bankruptcy, a business quickly pays some of the trading partners who are owed money. This is called deliberately favouring creditors. Other business partners get nothing.

Withdrawals

In a bankruptcy, a trustee manages the equity and assets of the company. You can find the name of the trustee in het Central bankruptcy register (Centraal insolventieregister, in Dutch). The trustee makes agreements with the parties that are still owed money. If an entrepreneur hides money or goods from the trustee, that is withdrawal fraud.  For example:

• Channelling away money through large private cash withdrawals.
• Removing assets such as cars, machines, and inventory.
• Having debtors pay into newly established bank accounts the trustee does not know about.
• Selling or taking the customer base to a newly established company owned by the fraudster.

Buy without paying

Fraudulent entrepreneurs sometimes buy things they cannot afford on purpose. They do not pay the seller and quickly resell the goods. By the time sellers claim the money they are owed and file for bankruptcy of the company, the fraudulent entrepreneur has disappeared.

Secretly pay for sale of company

Entrepreneurs who are heavily in debt sometimes sell their company, so that the buyer can let it go bankrupt. Knowing that the business is beyond saving, the buyer officially takes over the business for a small fee, while the seller quietly pays him for taking over the business. The new owner destroys the financial accounts and makes all possessions of value disappear. As a result, business partners who are still owed money do not receive anything. Not being able to show accounts or destroying them is punishable by law.

Abuse of fast-track liquidation

Turbo liquidation or fast-track liquidation is a quick way to dissolve a BV, NV, stichting, or other legal entity. This is only possible if the legal entity has no assets. In practice, this is sometimes abused. The assets are then channelled away by the director and only the debts remain in the company. Those who are still owed money are the victims. They do not get their money.

Straw owner

In the event of bankruptcy, a director is liable for the debts of the company with their business assets and sometimes also with their private assets. In order not to lose money, fraudulent entrepreneurs appoint a so-called ‘straw owner’ shortly before the bankruptcy. This is someone without money and possessions who registers at KVK as a director, owner, or shareholder of the company.

This person takes over the company including the debts and assets. The assets are then removed from the business and passed on to the original owner. The debts remain unpaid. In the event of a declared bankruptcy, there are no assets to be recovered from the straw owner. The business and private assets of the original owner remain unaffected. Straw owners are often recruited on the street and are difficult to find because, for example, they have no permanent address or work.

Take action against bankruptcy fraud

Do you suspect that your company is a victim of bankruptcy fraud? Report this to the Fraud Helpdesk and contact the bankruptcy trustee. The trustee will report the bankruptcy fraud to the Central Bankruptcy Fraud Reporting Point.

Share the information you have about the bankrupt entrepreneur, also called the debtor, with the trustee. They assess whether there has been obvious mismanagement by the debtor. If this is the case, the trustee can reclaim part of or the entire bankruptcy deficit from the bankrupt entrepreneur. They have to pay this, for example from their personal assets. The bankruptcy deficit is the total amount of debts and bankruptcy costs, minus any proceeds received after the bankruptcy. Has the debtor made payments that disadvantage creditors? The trustee can reverse these transaction.

As a creditor, it is not always possible to get all your money back. Sometimes you will get some of it back and sometimes nothing at all. This only becomes clear when the trustee has completed the bankruptcy. 

Check the Business Register

You can prevent problems if you know who you are doing business with. You may suspect that a company is bankrupt or has filed for suspension of payment with the court. You can check this in the Business Register. It contains all Dutch businesses and organisations. You can look up information on a foreign trade partner via a foreign register.

Remember that potential business partners also look up information about your business in the Business Register to see if you are trustworthy. Your company evolves and your situation may change. So, check regularly whether your registration is still correct.