Bankruptcy fraud is not being combatted effectively. When the trustee finds irregularities, the fraudster is not always punished. Politicians and the court case involving fashion chain Miss Etam's 'rescuer' have rekindled the debate on bankruptcy fraud.
In July, the trustee won a legal case against businessman Martijn Rozenboom after he was held personally liable for manifestly unlawful management at Miss Etam. As a result, Mr Rozenboom has been ordered to pay for the million-dollar deficit in the bankruptcy settled by the trustee. This is a landmark ruling as it is extremely rare for directors to receive sanctions in cases of fraud.
Research into fraud strategy outcome
Dr Jessie Pool, Assistant Professor of Company and Insolvency Law, follows these kinds of cases closely. She has researched why trustees may fail to tackle irregularities and why corporate misconduct is not always punished.
A trustee should not throw good money after bad
The research showed that trustees are not allocated enough money to conduct extensive fraud investigations. A rogue director could purposefully sabotage an investigation by leaving a company devoid of assets. However, even if the trustee is able to investigate and subsequently finds that fraud has occurred, they cannot always recover a claim. This may happen if a director has siphoned off money from an estate left to relatives or transferred it to a foreign company, for example.
If a trustee is unsure whether they will be able to recover the money from a fraudulent director, they will not launch liability proceedings. 'After all, if the proceedings will only cost money and achieve nothing, it wouldn't be in the interests of the joint creditors for the trustee to throw good money after bad,' explains Dr Pool.
Frustration with FIOD and the police
A trustee may also decide to launch criminal proceedings and file a report of bankruptcy fraud. It is then up to the police or the Dutch Fiscal Intelligence and Investigation Service (FIOD) to handle the report and decide whether it may lead to a conviction. Dr Pool adds: 'Although this sounds like a nice solution in situations where there are no recovery options, it's very unlikely that the report will actually be processed by the Central Reporting Centre for Bankruptcy Fraud. Capacity issues mean that some reports are not prosecuted or even investigated, which causes dissatisfaction and frustration among trustees.'
A conflict of interests
Furthermore, Dr Pool's research concluded that while it is the trustee's task to tackle bankruptcy fraud, this is not always in the creditors' interests. After all, trustees are responsible for investigating irregularities. However, if it later transpires that nothing untoward happened then the investigation would have been conducted at the creditors' expense. The trustee therefore has to weigh up the interests of the creditors against their own motivation to help combat bankruptcy fraud.
Should irregularities be investigated at the expense of a payout to creditors? That's a policy decision that remains unclear
A motion to change the Dutch Bankruptcy Act
The same conclusion has been reached within the political arena. Back in June, the Dutch MPs Michiel van Nispen (SP) and Ulysse Ellian (VVD) tabled a motion to investigate how trustees can be encouraged to examine irregularities in every bankruptcy case. They suggest solutions such as changing how trustees are remunerated and introducing a more effective method of handling fraud reports.
This motion aligns with the results of Dr Pool's research, as she concluded that it is important to help and encourage trustees with tackling fraud. This can be done by clarifying how they should combat fraud, offering appropriate remuneration for that and processing their fraud reports.
Decisions needed
It is still important to solve the conflict of interests, Dr Pool feels: 'Should irregularities be investigated at the expense of a payout to creditors, even if it's clear beforehand that there are no recovery options? That's a policy decision that remains unclear.'
Dr Pool and her colleagues are currently researching alternatives to the current method of renumerating trustees. This research has been commissioned by the Research and Data Centre (WODC) and the results are set to be published in the autumn.
Author: Jan-Willem Oomen
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