Bankruptcy fraud: how to recognise and prevent it

In 2021, 1729 companies went bankrupt. In most cases because of financial problems, but some companies went bankrupt deliberately to mislead and disadvantage trading partners. What examples of this type of bankruptcy fraud are there and how do you recognise it?

At the beginning of July 2022, the Fiscal Intelligence and Investigation Service (FIOD) arrested an entrepreneur from Eindhoven. He allegedly committed fraud for €2.6 million. He ordered an expensive car and other luxury goods 'on the business,' but let the company go bankrupt and never paid off those debts. This is an example of bankruptcy fraud.

What’s bankruptcy fraud?

Bankruptcy fraud is a type of fraud that an entrepreneur commits by making their company go bankrupt, for example after they have deliberately incurred debts. Another example of bankruptcy fraud is that an entrepreneur deliberately disadvantages a creditor, for example by keeping certain assets or money secret in the event of bankruptcy. Fraudulent bankruptcy is punishable by law.

Recognising bankruptcy fraud is difficult

Recognising bankruptcy fraud in advance is difficult. However, you can keep an eye out for signals (in Dutch) that indicate financial problems and possible imminent bankruptcy of your customer:

  • High staff turnover at your customer’s. Irregular orders, meaning the customer buys less or more than usual.
  • Irregular payments, meaning your customer stretches the payment terms.
  • Escape behaviour of the entrepreneur: you can no longer reach your customer and they avoid you.

Be alert to fraudulent bankruptcy. Prevent non-payment and take timely steps if your customer does not pay the invoice.

Examples of bankruptcy fraud

How do scammers commit bankruptcy fraud? There are several forms:

Favour

Sometimes, just before the bankruptcy, a fraudulent entrepreneur quickly pays a few trading partners who are owed money. This is deliberately favouring creditors. The other business partners who the entrepreneur still owes money are left with their unpaid invoice.

Withdrawals

In a bankruptcy, a curator manages the equity and assets of the company. You can find the name of the curator in het Central bankruptcy register (Centraal insolventieregister, in Dutch). The curator makes agreements with those who are still owed money. If an entrepreneur keeps money or goods out of sight of the curator, that is 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 curator does not know about.
  • Selling or taking the customer base to a newly established bv owned by the fraudster.

Buy without paying

Fraudulent entrepreneurs sometimes purposely buy things they cannot afford. 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 fraudulent entrepreneur, the fraudulent entrepreneur has disappeared.

Secretly pay for sale of company

Entrepreneurs who are heavily in debt sometimes choose to 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.

Abuse of turbo liquidation

Turbo liquidation (in Dutch) or fast-track liquidation is a quick way to dissolve a bv, nv, foundation, 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.

In the event of bankruptcy, the curator makes an overview of debts and assets. They investigate whether the directors have not channelled any possessions away. There is also a liquidator who handles the distribution of the money when a legal entity is dissolved.

A turbo liquidation is different from a bankruptcy. In a turbo liquidation there are no liquidator and curator. The person who is owed money, the creditor, has to demonstrate that there were possessions in the company. This can prove to be difficult in practice. To better protect creditors and prevent abuse, the government is working on new regulations. The effective date of this is not yet known.

Straw owner

In the event of bankruptcy, a director is liable for the debts of the company with his business and sometimes also with his 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 the Netherlands Chamber of Commerce 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 is nothing to be gained from this 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 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 curator. The curator will report the bankruptcy fraud to the Central Bankruptcy Fraud Reporting Point.

Share the information you have about the bankrupt entrepreneur who still owes you money, also called debtor, with the curator. They assess whether there has been obvious mismanagement by the debtor. If this is the case, the curator will reclaim the entire bankruptcy deficit, which is the proceeds minus the debts, from the bankrupt entrepreneur. The curator may also reverse transactions of the debtor that are detrimental to creditors.

The curator can hold a director of a legal person, such as a private limited company, personally liable on the basis of mismanagement. This means that no reasonable manager in the same industry would have made the same decisions in the given situation. And that this deliberate action by the director is an important cause of the bankruptcy.

Doing business securely

You can prevent fraud if you know who you are doing business with. You may suspect that a particular company is bankrupt or is in deferral of payment or liquidation. Then check this in the Business Register. It contains all Dutch companies, enterprises, and legal forms. You can look for a foreign trade relationship via a foreign register (in Dutch).

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What measures can you take to prevent fraud? Read all about secure business operations.
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