The United States as an example
There are two issues involved in this changing role of the tax authorities. First, European countries are jointly trying to improve their business climate. They are looking in particular at the United States, where the Chapter 11 procedure safeguards companies with payment problems from bankruptcy.
That procedure is sometimes mistakenly compared to the ‘suspension of payments’ (‘surseance van betaling’) in the Netherlands. Although both are a precursor to bankruptcy, the chances of escaping it are much higher in the US. This is because the possibilities of forcing an agreement with creditors are much greater, without the entrepreneur being sidelined by the appointment of an administrator or receiver. A US court can approve debt restructuring even if not all creditors involved agree. Moreover, debt can be converted into shares in the business.
Europe going Anglo-Saxon
The UK operates using similar legislation, which is also designed to prevent rather than settle a bankruptcy. Again, a court can impose a ‘scheme of arrangements’ on creditors. There are several examples of companies that – although not based in the UK – have sought refuge in London to pursue such debt restructuring.
In the Netherlands, a suspension of payments almost automatically ends in bankruptcy, partly because of the inflexibility of the legislation. But also because during the suspension of payments, agreements can only be enforced with ‘unsecured’ creditors, i.e. creditors with no preferential position, not with the tax authorities or, for example, staff members.
Brussels has been working in recent years to create a more Anglo-Saxon insolvency practice for European Member States via the Restructuring Directive as it is called. The idea is to introduce coordinated European legislation enabling preventive debt restructuring and offering viable businesses a real chance of survival, even if they cannot pay all their creditors.
Besides these international developments, the COVID-19 pandemic has recently caused a more accommodating attitude in debt restructuring. This is reflected, for example, in the relaxed policy of the tax authorities. Due to the lockdowns, many businesses saw their sales plummet. Over one in three businesses claimed the financial support offered by the government. Tax deferral was one of the support measures. As a result, the tax liabilities of the business community soared during the pandemic. The tax authorities are owed billions by tens of thousands of Dutch businesses.
Because of the size of the tax debts – more than €15 billion in total – it is not in the interest of the tax authorities to actively send bailiffs around the country and cause one bankruptcy after another. It would be a blow to the national budget if many of these debts turn out to be irrecoverable, not to mention the misery for entrepreneurs and their employees.
Tax authorities are becoming tougher again
Now that the pandemic is over, the tax authority’s leniency is coming to an end. Companies with arrears would be wise not to wait. The tax authorities have announced that from mid-June 2023 they will again resort to enforced collection if businesses miss their payment deadlines. Businesses that want to be future-proof put their house in order, whether it is privacy, environment, diversity, climate or their financial health.
Just because the tax authorities are going to tighten the thumbscrews again does not mean that nothing more can be done. Importantly, they continue to apply a more lenient policy when dealing with restructuring requests. Previously, the tax authorities took the position that it should receive at least double the percentage of non-preferential creditors in a restructuring. In addition, there were countless formal requirements entrepreneurs had to meet. During the COVID-19 pandemic, the tax authorities relaxed this strict policy. For example, it still settles for the same percentage as non-preferential creditors. When in doubt, playing catch-up is now key, because in October, the lenient regime will expire and the tax authorities will revert to the stricter rules of the past.
Addressing the issues proactively is always an option. After all, even in the Netherlands there are opportunities to reach agreements with creditors before a suspension of payments or bankruptcy, and if necessary to have those agreements declared binding by a court. The Dutch Court Approval of a Private Composition (Prevention of Insolvency) Act (Whoa) is the statutory basis in this case. In many cases, such a formal Whoa process is not even necessary, as the prospect of such a settlement usually makes creditors voluntarily agree to a reasonable and well-substantiated proposal.
In short, as an entrepreneur in debt, it pays not to wait but to take the initiative. Permanently carrying debt can push viable businesses into the red for the long term. Timely debt restructuring is the starting point to ensure business continuity. Waiting until the last reserves are exhausted means there is nothing left to get for creditors, which means that there is nothing left to negotiate.