Customs practice: bankrupt and moving on!

1. Introduction

Customs law is a risky business. A small error in a commodity code can have disastrous consequences. For example, an additional claim for a period of three or five years for underpaid or unpaid import duties. This kind of post-clearance recovery can run into millions and can subsequently put your company at great risk. Given this knowledge, it is important to protect your company by mitigating the risks as much as possible. The company law structure is the foundation in this regard.

2. The purpose of a private limited company

Most companies within the customs business are incorporated into a private limited company. A Dutch private limited company (hereinafter also: BV) has several advantages. It is a legal form with its own legal personality. This means that the BV can independently participate in legal transactions, has its own rights and obligations, but also its own assets and debts. In essence, it is normally the legal entity alone that is liable for the debts it incurs, and not the directors.

Only in exceptional cases another (natural) person, like the director of the legal entity, is also (next to the BV) liable. This is for example the case if the director has (deliberately) mismanaged the company. An example is a director who signed an agreement while knowing that the legal entity could not fulfil that agreement.

The BV being a legal entity is therefore in essence a closed framework. If the BV receives an additional assessment while having insufficient assets, it is in principal the BV that has to pay that amount. If the BV does not have sufficient assets and therefore cannot pay the amount, bankruptcy is inevitable in many cases. The legal entity ‘dies’ and the creditors – including Customs – can (only) be paid from the last assets the legal entity possesses. In practice, most creditors are left empty-handed after bankruptcy.

3. Bankruptcy, now what?

With the bankruptcy, the BV also loses its authorisations. There is no other option than to stop customs operations. After all, without authorisations, there is no business. But perhaps there is another possibility? Because if there were another BV available with authorisations now, the activities could perhaps be continued in that BV. This is where the importance of a proper corporate structure manifests itself.

4. An additional operating company

Perhaps your company is part of a group, where the shares of the operating company are held by a holding company. This approach offers several advantages. In the holding company, you can deposit the profits so that their ‘value’ is safe in case of bankruptcy of the operating company. But apart from setting up your structure vertically, a horizontal expansion of the group can also have great advantages. For example by establishing an additional legal entity as an operating company.

With a second (or third) operating company, high-risk activities can be divided. Doing this could be an effective way of spreading risks. For example, you can then place your riskiest activities in a specific company. If a high additional assessment is unexpectedly received by that company and there is no alternative but to file for bankruptcy, the activities in the other private limited company can ‘just’ continue. After all, there is still a ‘living’ entity, which also holds all the necessary authorisations. Of course, bankruptcy is not a goal, but establishing an additional BV could be a way to continue a business with its employees. It is also useful to perform activities as a limited tax representative (BFV) in a separate BV. After all, a BFV has unlimited liability, so a huge tax debt for one of the BV’s principals could again have major consequences for its continued existence.

A ‘back-up’ entity may therefore be very useful. However, the entity is only useful for carrying out customs activities if it also has the relevant authorisations. Keeping the authorisations ‘in reserve’, is not sufficient. Customs expects – rightly so – that the authorisations granted by Customs are actually used. If an authorisation is not used, Customs will revoke it. The company has to be actually used for the activities.

In summary, establishing a company operating within customs law can be optimised in many ways. A good corporate law structure for the company is essential in this regard. If you would like to know more about doing so, please contact one of our legal advisors.

While every care has been taken in the preparation of this publication, Customs Knowledge accepts no liability for any errors or omissions, nor for their consequences. This article is not intended as specific advice. Please also refer to the General Terms and Conditions of Customs Knowledge BV.