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(Sh)it happens! And that includes bankruptcies

There are times when an administrator has too weighty a role in settling bankruptcies. This is the message of Professor Reinout Vriesendorp's inaugural lecture on 24 June.

According to Statistics Netherlands, 5,271 companies were declared bankrupt in 2015.  When that happens, the court appoints an administrator whose job is to make sure that the creditors receive as much of what is due to them as possible. Part of the administrator's remit is to find out what caused the bankruptcy. Soon-to-be-introduced legislation will broaden the authority of the administrator. 


Vriesendorp questions whether it is always necessary to determine the cause of the bankruptcy, and has doubts about whether the administrator is the most appropriate person to head such an investigation, for example if he intends to lay the responsibility for the bankruptcy with those running the company.  Vriesendorp has been part-time Professor of Insolvency Law at Leiden University since 1 January 2016, and will deliver his inaugural lecture on 24 June. In his lecture he will state that in such cases the administrator has a personal interest in the outcome of the investigation into the bankruptcy: the administrator is paid from the bankrupt assets, which it is therefore in his interest to augment.

Vicious circle

According to Vriesendorp, there is also the danger that the administrator will be influenced by the phenomenon of ‘hindsight bias’ and the ‘ladder of inference’: in his investigation he may tend to use only those facts that support his interpretation of the situation and to subconsciously ignore other information. The administrator can find himself in a vicious circle of self-confirming reasoning, and might well arrive too rapidly at the conclusion that the bankruptcy was the result of mismanagement. This tunnel vision underestimates the role of 'force majeure', that can range from economic difficulties and investors who withdraw their support to the loss of important clients. In other words: shit happens.

Fewer investigations into the cause

Vriesendorp has some suggestions for improvement. He proposes that the investigations into the cause of the bankruptcy should be limited to those cases that have major societal impact or where there are strong indications of fraud or evidently improper management, or if the creditors insist on an investigation. Not every bankruptcy justifies an investigation into the cause and there is little sense in throwing good money after bad. In any event, it would be better if the creditors were to be more involved in the process, preferably in the form of a creditors commission that could have a formal or informal status. 

Independent third party

In order to avoid any likelihood of a conflict of interests, Vriesendorp also advocates that investigations into possible liability should no longer be carried out by administrators because of their financial dependence on the outcome of such investigations. Causal investigations should be delegated to an independent third party, in which the creditors who will bear the risk of the outcome should in principle have a deciding voice. 

Hindsight bias and tunnel vision

In order to avoid ‘hindsight bias’ and tunnel vision, possible alternative causes (‘counterfactuals’) should expressly be included in the investigations. In Vriesendorp's opinion, inspiration can be sought here in the investigations in the healthcare and aircraft industries into accidents and near-misses: after all, isn't a bankruptcy a 'calamity' for those who are most closely involved?

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