(Originally published on September 16, 2011)
Strong position of secured creditors
A striking feature of Dutch insolvency law is the strong position of secured creditors. Pursuant to Section 57 of the Bankruptcy Act, a pledgee and a mortgagee may independently exercise their rights as if there were no bankruptcy at all. This means that they have the same enforcement rights during the pledgor's bankruptcy as they would without the bankruptcy. When the pledgee or mortgagee forecloses in case of bankruptcy, it is entitled to receive the proceeds of the sale without having to share in the costs of the bankruptcy proceedings. Furthermore, an arrangement between the debtor and its creditors to reorganise the former's debts, when approved by a certain majority of ordinary creditors and upon confirmation by the court, cannot be binding on secured creditors. Some international experts have even called the Netherlands the 'promised land' for secured creditors, as their position based on Section 57 (the so-called 'separatist position') is so strong.
Another reason why the position of secured creditors is so strong is because it is difficult for the trustee in bankruptcy to argue that certain pledges of trade receivables constitute fraudulent preferences in an attempt to avoid them; for example, if a borrower were to pledge such receivables because it was obliged to do so under a credit agreement. According to Dutch law, this pledging transaction is regarded as a 'mandatory legal act'. The trustee may avoid such a legal act if it is prejudicial to one or more creditors and:
- the counterparty knew that a request for bankruptcy had already been filed; or
- the debtor and the counterparty colluded to give preference to the latter over other creditors (Section 47 of the present act).
Collusion between the counterparty and the debtor is usually hard to prove, especially because it must be established that the debtor also intended to favour the counterparty over other creditors. In practice, it appears simple for a debtor to refute the accusation that it wished to defraud creditors. It need only to argue that it performed its obligation under the threat of legal action by the creditor or other similar pressure.
Aims of preliminary bill for new Insolvency Act
In 2003 the State Committee for Insolvency Law was appointed to advise the government and Parliament on possible insolvency law reforms, as the Bankruptcy Act was more than 100 years old and regarded as outdated in certain respects. Although the committee was asked only to advise on possible changes to the existing legislation, it took a broader view of its responsibilities and drafted a complete preliminary bill for a new Insolvency Act, which was published on November 1 2007.
At the beginning of the explanatory memorandum to the bill, the committee observed that it was important to take account of insolvency developments in other EU member states. One common trend observed was a commitment to strengthening the position of unsecured ordinary creditors by taking control over the enforcement of the bankruptcy estate away from the secured creditors and giving it back to the bankruptcy trustee. The bill aimed to reflect such EU developments. This also entailed that the preferential treatment accorded to a bank in its capacity as a secured creditor was reduced, and that the possibilities for avoiding fraudulent preferences were expanded.
Less preferential treatment for secured
creditors
Article 3.6.9 of the bill provided that if the
debtor's business were continued, the administrator (a new name
for the bankruptcy trustee) would have the exclusive power to
sell:
- any mortgaged property;
- any pledged property that had remained under the debtor's control; and
- any property that had been supplied subject to a retention of title.
Since Article 1.1.2 required the debtor's business to continue insofar as possible, it is likely that the administrator would often take such actions. Thus, under Article 3.6.9 in many cases secured creditors would lose their right to enforce their security interest. In most cases, the administrator would:
- also have full control over the sale of the secured property;
- be obliged only to notify the creditor in question of the intended sale, after which the creditor could lodge an objection with the supervisory judge; and
- be obliged to pay the proceeds of any sale to the relevant secured creditor, after first deducting a charge.
The banks argued that it would be preferable to eliminate the proposed Article 3.6.9 from the bill. They stated that weakening the banks' position in their capacity as secured creditors would be justified only if the banks clearly showed a tendency to abuse their position by liquidating the secured assets at an early stage, thereby frustrating the sale of the business as a going concern. However, there was no such evidence; banks would only consider liquidation if the debtor's business stopped being viable.
Expansion of possibilities to avoid fraudulent
preferences
The bill made it easier for the administrator to
avoid a mandatory legal act. The draft text provided that such an
act, performed by the debtor in the three months before the request
for the opening of insolvency proceedings, could be avoided by the
administrator if:
- the counterparty knew or should have known that the debtor's declaration of insolvency was inevitable; and
- the transaction would be prejudicial to one or more creditors.
An exception could be made only if there were a justification for the act (eg, if the transaction was made in the ordinary course of business). Obviously, under many circumstances it would be easier to prove that the counterparty had (constructive) knowledge that insolvency was inevitable and that the transaction would be detrimental to creditors, than to establish that the debtor and the counterparty colluded to give preference to the latter over other creditors (which is required under the present insolvency law). The fact that under the bill it would become easier for an administrator to avoid a mandatory legal act would make it more difficult to rely on the valid creation of a security interest. The banks argued that as a result of this uncertainty, it could become more difficult to grant credit to businesses facing financial difficulties.
Final decision
The minister of security and justice sought comments on the preliminary bill by conducting an online consultation, which closed on September 15 2008. Only a minority of the comments submitted online and in legal journals were favourable; the majority were moderately critical and a large minority were very critical. In the autumn of 2009 the minister informed the Lower House that his ministry had no capacity to undertake such a large legislative project. Since then, there have been no further signs of progress.
Subsequent to an interview with the chairman of the committee in the government gazette, Staatscourant, a member of Parliament asked the minister why it had taken so long to draft an actual bill for a new Insolvency Act. On January 11 2011 the minister highlighted that the bill contained a number of controversial proposals, which included measures that would affect the position of secured creditors. The minister also remarked that the government:
- wished to avoid the risk of deterioration of the recovery position of banks, leading to a reduction in the number of lending transactions; and
- saw no good reason for a complete revision of the Bankruptcy Act on the basis of the bill.
Hence, it is safe to conclude that the Bankruptcy Act will not be revised and thus – at least for the time being – the strong position of secured creditors will remain unaffected.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
