Trends and reforms
59 Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?
Legislative overhaul of Dutch insolvency law
In 2012, the Dutch legislator announced a legislative overhaul of Dutch insolvency law under the name ‘the Re-assessment of Bankruptcy law’. This legislative programme aims to improve Dutch insolvency law. Legislative proposals that focus on the prevention of bankruptcy fraud, the negative social and economic effects caused by it, and the strengthening of the of position of the bankruptcy trustee have entered into force in 2016 and 2017 (the first category; ie, the Directors Disqualification Act, the Bankruptcy Fraud Amendment Act and the Act Strengthening of the position of IPs). They have resulted in, among others, a broader civil and criminal liability of (supervisory) directors and in statutory duties for the insolvent company (including its directors and officers) or third parties in control or possession of the insolvent company’s administration to provide information or cooperation to the bankruptcy trustee.
The legislative proposals regarding the enhancement of companies’ ability to reorganise (second category) are still pending: the proposal introducing the legal basis for a pre-pack procedure, the proposal providing for court confirmation of a private restructuring plan and the proposal regarding the continuation of business in bankruptcy.
The third pillar of the programme regards the legislative proposal aiming at the modernisation of bankruptcy proceedings, which entered into force in January 2019.
The Continuity of Companies Act I (proposal)
The legislative proposal the Continuity of Companies Act I introduces a legal basis for the pre-pack sale, a procedure which has been developed and applied in the legal practice but lacked a statutory foundation. The proposal introduces a system in which debtors in financial distress are able to prepare and attempt a silent reorganisation or restructuring of the debtor’s business through a pre-pack procedure. The proposal was adopted by the Lower House in 2016 and has been pending before the Dutch Senate since then.
The ECJ’s decision in the Smallsteps case (C-126 16) on 22 June 2017 made it clear that the pre-pack procedure in that case, could not be viewed as a procedure upon which the exceptions to the rules concerning protection of employees in the event of the transfers of undertakings applied, meaning that employees who are confronted with a pre-pack procedure must be protected in accordance with the rules concerning the transfer of undertaking. The ECJ concluded that the exception to the rules that protect employees in a transfer of undertaking only applies if certain requirements are met. In particular, the requirement that the proceedings have to be instituted with a view to liquidate the assets (and not with the intension to continue the business) has led to uncertainty in the legal practice.
The application of the employee protection rules concerning the transfer of undertakings ‘should be determined on a case-by-case basis by either the bankruptcy trustee designate or a court (as the case may be) in accordance with the ECJ’s decision in the Smallsteps case’, according to the Ministry of Security and Justice. Since the publication of the ECJ decision, several decisions have been rendered by Dutch courts of appeal in 2018 that indicate that the use of a pre-pack is still possible and confirm that the application of the employee protection rules concerning the transfer of undertakings is to be determined on a case-by-case basis, taking into account all the relevant circumstances of the individual case. Debate on this topic has led to a separate legislative proposal on the position of employees and employee rights in a transfer of undertaking in insolvency (see further below). Pending a legal regulation regarding the transfer of undertaking, the treatment of the pre-pack proposal will be deferred. The Lower House has in June 2019 indicated it will treat the pre-pack proposal together with the proposal on the transfer of undertaking.
The Act Transfer of Undertaking (draft proposal)
During the parliamentary treatment of the proposal regarding the pre-pack (previous paragraph), the position of employees and employee rights in a transfer of undertaking in insolvency, as well as employees’ participation rights and the position of the works council has been actively discussed. The topic has gathered pace after the ECJ decision in the Smallsteps case (C-126 16). This has led to a separate draft legislative proposal regarding the introduction of a set of rules concerning the rights of employees in insolvency, in particular in the event of transfers of undertakings (the Act Transfer of Undertaking in Insolvency). It was published in May 2019 and the public consultation ran until August 2019. The proposal is based on Directive 2001/23/EG regarding the protection of employees in the event of transfers of undertakings (Directive 2001/23/EG).
The proposal will amend the Dutch Civil Code, as well as the Bankruptcy Act and the Works Councils Act. The proposal proposes that in the event of a transfer of undertaking, employees who are employed by the insolvent company at the time the company is declared insolvent will in principle automatically be transferred to the acquirer of the business under the same employment conditions. Currently under the Dutch Bankruptcy Act it is possible to terminate employment contracts shorty after a company is declared bankrupt, which means that in practice, in the event of a transfer of undertaking in bankruptcy, employment contracts will often already be terminated validly at the time of the transfer of the business. Under the proposal, Book 7 of the Dutch Civil Code will be amended to require the acquirer of the business to offer all employees employment contracts under the same conditions as the contracts with the bankrupt employer. The proposal provides for one exception: if job losses are the result of operational, technical or economic circumstances, the acquirer is allowed to take over fewer employees. In that case, the acquirer has to demonstrate that objective circumstances require measures that will lead to the structural loss of jobs.
Payments that have become overdue under employment contracts as well as accumulated claims under employment contracts that already existed before the transfer of undertaking (such as back wages and outstanding bonus claims) will not be transferred to the acquirer.
Employees who will not be transferred to the acquirer cannot be restricted to be employed by third parties by noncompetition clauses, according to the proposal.
In the event of a transfer of undertaking, the bankruptcy trustee can only accept the take-over offer by the acquirer under the condition of compliance with the proposed regulation. The bankruptcy trustee is required to consult the works council on the transfer of business and needs to request permission from the supervisory judge before he or she can proceed with a sale of business. A new requirement under the proposal is that the supervisory judge needs to hear the directly interested parties, including the bankruptcy trustee, the intended acquirer and the works council, before rendering a decision (currently the supervisory judge only needs to hear the bankruptcy trustee to be able to grant permission for a private sale of business). The intended acquirer needs to provide the supervisory judge with the information that is necessary to render a decision. It is possible to appeal decisions by the supervisory judge within five days.
The Act on Court Confirmation of Private Restructuring Plans (proposal)
The legislative proposal providing for court confirmation of a private restructuring plan (the Proposal) was submitted to parliament on 8 July 2019. The Proposal introduces a fast and efficient procedure to restructure a company’s business through a scheme between the company and its creditors or shareholders. It is considered a last-resort pre-insolvency restructuring tool, designed as a framework procedure with limited involvement of the court. The Proposal features elements of the US Chapter 11 procedure and the UK Scheme of Arrangement.
The current proposal follows from two previous draft proposals in 2014 and 2017, which have been amended significantly as a result of consultation rounds and feedback from practitioners. It ties in with the preventive restructuring framework of the Directive on insolvency, restructuring and second chance (although a separate legislative proposal that implements the directive will be prepared). The Proposal needs to be approved by parliament, signed and published in the Bulletin of Acts and Decrees, after which it will come into force, most likely in the course of 2020.
The proposal provides for two types of restructuring proceedings: a public version and an undisclosed version. The person or persons who initiate the procedure may choose the type of procedure they prefer. The public version will automatically be recognised in other EU member states under the European Insolvency Regulation if the debtor’s COMI is located in one of the member states. If its COMI is located in the Netherlands, the Dutch Court will have jurisdiction. The undisclosed version, which is exempt from publication requirements, would not be automatically recognised under the European Insolvency Regulation. It is expected that the undisclosed version will be recognised under the Recast Brussels Regulation. For this procedure, jurisdiction of the court will be determined on the basis of the Dutch Code of Civil Procedure generally.
A plan can be prepared and initiated by a debtor if it is reasonably plausible that he or she will not be able to pay its debts when fully due. In addition, one or more creditors, shareholders or a works council or trade union have the right to initiate the debtor’s restructuring. They can request the court to appoint a plan expert who prepares and starts the process that could lead to the confirmation of the plan.
The debtor can request the court to allow a stay for a maximum of four months, with the possibility of an extension up to a maximum of eight months. Emergency funding, such as the provision of security required for the restructuring, is protected against claw-back actions.
A plan can constitute amendments to the rights of all creditors and shareholders, both secured and unsecured, or certain groups of creditors or shareholders. The proposal allows for the debtor to terminate any executory contract, including as lease contracts (but not employment contracts), with its contractual counterparty if that counterparty does not agree with any modification or termination the debtor proposes. The debtor needs to request the court for permission for this termination. Upon commencement of the procedure, contractual provisions that allow the debtor’s counterparty to terminate, amend or suspend a contract, or providing for automatic termination, remain inoperative. The proposed plan can also include a debt-for-equity swap.
All creditors and shareholders whose rights are affected by the plan are entitled to vote. If the plan affects different categories of creditors or shareholders (ie, if they would have a different rank in bankruptcy, they need to be placed in different voting classes). The plan will be voted on by each class separately. A class has accepted the proposed plan if the group of creditors who vote in favour of it represents at least two-thirds in value of the total value of claims within that class. In case of shareholders, that group needs to represent at least two-thirds of the issued capital within that class. The debtor is allowed to submit the plan for court confirmation if the plan is approved by at least one of the ‘in the money’ classes.
Until the day of the hearing, all creditors and shareholders eligible to vote can submit a reasoned request to the court to refuse the confirmation of the plan based on one of the limited general or additional grounds of refusal as provided for in the proposal. The court will refuse confirmation on the basis of one of the general grounds at its own motion or at the request of a creditor or shareholder if, for example, formal requirements have not been met. The court will confirm the plan if it has no reason to refuse confirmation on the basis of one of the general grounds for refusal and no creditors or shareholders have objected on the basis of the additional grounds of refusal (ie, if under the plan the creditors or shareholders would receive less that they would upon liquidation (‘best interest of creditors’ test’) or if the going concern value of the company would not be distributed fairly among the creditors or shareholders in accordance with their statutory ranking (the ‘absolute priority rule’)). Additional grounds for refusal can be invoked only by creditors or shareholders who voted against the plan.
After confirmation by the court, the plan is binding on all creditors and shareholders, including ‘out of the money’ classes as well as creditors and shareholders who did not vote or who voted against the plan. The decision of the court is not subject to appeal.
The Act Enhancement of the Efficiency of Insolvency Procedural Law
The legislative proposal for the enhancement of the efficiency of insolvency proceedings will provide means to facilitate the continuation of businesses in bankruptcy. It is aimed at improving the ability of the bankruptcy trustee to efficiently settle the bankruptcy and limit the damage for all parties involved as much as possible. Among others, it will look at the position of employees and employee participation, as well as the suspension of payments procedure. This proposal is still in the preparatory phase.
The Act Modernisation of Bankruptcy Proceedings
This act focuses on achieving a more efficient and transparent insolvency procedure in which the bankruptcy trustee can exercise his or her duties more easily and effectively. In addition, the proposal aims to increase the proceeds for the creditors and to reduce the costs in an insolvency proceeding. The act entered into force on 1 January 2019 and applies to bankruptcies opened in the Netherlands on or after 1 January 2019.
The measures can be divided into four categories. The first category contains measures to increase digitalisation and accessibility of information in the insolvency process. The act provides for the obligation for orders of the supervisory judge to be made public through the Central Insolvency Register, which will benefit the efficiency and transparency of information for the market. The local insolvency registers will become ineffective. In addition, under the act the supervisory judge can choose for a creditor meeting to take place in a physical, digital or written form, which should be beneficial to, among others, foreign creditors.
The second category of measures aims to increase the speed of the procedure. An important change under the act is the introduction of a ‘bar date’ for the filing of claims with the bankruptcy trustee. Claims must be filed within 14 days prior to the day of the first creditors meeting (unless the supervisory judge decides differently), after which it is no longer allowed to submit claims (see also question 36). Another novelty is the abolishment of the possibility to object to the expiry of the bar date, meaning that creditors will have to ensure that they file their claim for the correct amount in a timely manner.
The third category involves measures aimed at a tailored approach in a bankruptcy. Under the act it is up to the supervisory judge when to decide and if a creditor meeting will be held, rather than the obligation to determine the day of the creditor meeting within 14 days after the final judgment of declaration of bankruptcy. The act also provides for the possibility to hold multiple creditor meetings in case complex bankruptcies require such flexibility. Another important change in this category is that the bankruptcy trustee will have the authority to place claims on the filing list of claims of creditors, in addition to creditors themselves. Finally, a creditors’ committee can consist of as many members as desirable, as long as the number of members is uneven and represents the most important groups of creditors.
The fourth category aims to increase the level of specialisation and expertise of the judiciary. The act provides for the possibility to appoint multiple supervisory judges in a bankruptcy procedure. Additionally, the supervisory judge can appoint an expert to support him or her in complex proceedings that require particular expertise. Finally, the act provides for the establishment of an advisory body that could advise on insolvency law (the ‘Commission on Insolvency Law’).
Implementation of the Restructuring Directive
Directive (EU 2019/2015) of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt (the Restructuring Directive) was formally adopted on 20 June 2019 and came into effect on 17 July 2019. Member states have in principle two years to implement the measures. The Act on Court Confirmation of Private Restructuring Plans (see above) ties in with the aim of the Directive to ensure that member states have a preventive restructuring framework in place. A separate legislative proposal that implements the directive will be prepared (which, according to the Ministry of Justice and Security in August 2019, will amend the current regime regarding the composition in ‘suspension of payments’).
The Ministry of Justice and Security is considering amending the Dutch Bankruptcy Act to incorporate parts of the UNCITRAL Model Law on Cross-Border Insolvency. The Ministry is currently exploring the possibilities.
Other developments regarding Dutch restructuring and insolvency law
Insolvency Regulation vs Brussels I Regulation
In 2017, the Dutch Supreme Court asked the ECJ for a preliminary ruling regarding the qualification of anti-avoidance or fraudulent conveyance actions. The bankruptcy trustee in this case had filed a tort claim that he in his capacity as bankruptcy trustee brought on behalf of the joint creditors of an insolvent estate for compensation against a third party who acted unlawfully against the joint creditors, a ‘Peeters/Gatzen vordering’.
The Dutch Supreme Court referred the matter to the ECJ with respect to the question whether a claim, brought on the basis of tort, for the benefit of the joint creditors arises directly from rules regarding insolvency proceedings, in which case the Insolvency Regulation (recast) applies, or is based on general civil law rules, governing claims generally, in which case the Brussels I Regulation applies. Due to the cross-border element it is particularly relevant in this case to determine what the nature of the claim is, because that will decide which court has international jurisdiction and which law is applicable. It will be interesting to see how the ECJ will decide on this matter of international conflict of law rules regarding insolvency.
Recently, the ECJ ruled that a Peeters/Gatzen claim falls within the scope of Brussels I. Therefore, the bankruptcy trustee must bring his or her claim before the court of the member state where the harmful event occurred or where the defendant is domiciled. The ECJ states in its ruling that the concept of civil and commercial matters as laid down in Brussels I must be given a broad interpretation. For its decision, the ECJ looked at the nature of the claim, which is (as described above) a tort claim. Even though there is an undeniable link with the insolvency proceeding, as the claim is initiated by the bankruptcy trustee on behalf of the joint creditors, the creditor who suffered the damages may also directly file a tort claim. Hence, the claim cannot be exclusively pursued by the bankruptcy trustee and the claim can consequently not be considered a direct and inherent result of the opening of insolvency proceedings. The ECJ therefore ruled that the claim falls within the scope of Brussels I.
Proposal to prohibit contractual limitation on pledging receivables
In response to pressure from the business sector in the Netherlands, in July 2018 the Dutch Ministry of Justice and Security published a draft legislative proposal that will make ineffective any contractual provisions that limit parties’ ability to transfer or pledge receivables. The proposal has been prepared in consultation with several organisations from the business sector in the Netherlands, including the Confederation of Netherlands Industry and Employers, the Factoring & Asset Based Financing Association Netherlands and the Dutch Banking Association.
The aim of the proposal is to stimulate credit lending to small and medium sized companies. Currently, a limitation on pledging receivables is often included in standard contract terms and prevents companies from transferring and pledging their claims on third parties to banks or other lenders. By removing this obstruction, the Dutch government wants to stimulate investments, innovation and growth as it should result in an increase of receivables that can serve as collateral for financing. In addition, the intended ban should enhance the competitive position of the Dutch business sector in comparison to several other European countries. The consultation period on the legislative proposal has ended in 2018. In July 2019, the Minister of Finance stated that he will provide details about the timing and submission of the proposal as soon as possible.
Recovery and resolution of insurers
On 1 January 2019, the Act Recovery and Resolution of Insurers entered into force. This act expands and strengthens the framework for the recovery and resolution of insurers and replaces the previous legislative framework offered under the Dutch Intervention Act. For more details, please see question 4.
The act to amend the ‘settlement finality’ provisions in the Dutch Bankruptcy Act
Since the implementation of Directive 98/26/EC on settlement finality in payment and securities settlement systems (the Settlement Finality Directive) in 1999, the Dutch Bankruptcy Act contains specific provisions that ensure that insolvency proceedings against a participant in a settlement system do not retroactively affect the rights and obligations of other participants, nor their reliance on the normal financial guarantees inherent to a transaction in the system. For instance, the Dutch Bankruptcy Act specifically provides that the bankruptcy of a participant (eg, a bank) in a payment or securities settlement system (eg, TARGET2) will not have retroactive effect with respect to certain settlement transactions (eg, payments, set-off, netting, and other transfer orders) involving the bankrupt participant, nor will the granting of a cooling-off period affect the ability of a participant to seek recourse against assets of the bankrupt participant.
Currently, this protection only applies in relation to settlement systems that are: (i) specifically identified as such by the Minister of Finance; (ii) governed by the laws of an EU member state; or (iii) specifically acknowledged as such by an EU member state and registered with the European Commission. This effectively means that a Dutch bank participating in a settlement system that does not meet these criteria would not be able to guarantee to its counterpart that settlement transactions would not be retroactively affected if the Dutch bank were to become the subject of insolvency proceedings. With an aim to lift this disparity and to improve the competitiveness of Dutch financial institutions operating in the international market, the Dutch legislator has proposed to amend the Dutch Bankruptcy Act by expanding the definition of settlement system (now also including systems in other non-EU countries with adequate supervision) and by having the exemption on the retroactive effect of a Dutch bankruptcy judgment apply to all settlement transactions (whether or not those transactions occurred within a settlement system).
The act entered into force on 7 March 2019.
Netherlands Commercial Court
The Netherlands Commercial Court (the NCC) was created on 1 January 2019 and aims to effectively resolve international business disputes. The NCC consists of a District Court, a Court in Summary Proceedings and a Court of Appeal. A matter may be submitted to the NCC where: (i) the Amsterdam District Court or Amsterdam Court of Appeal has jurisdiction; (ii) the parties have expressly agreed in writing that proceedings will be in English before the NCC; (iii) the action is a civil or commercial matter within the parties’ autonomy and (iv) the matter concerns an international dispute. The entire proceedings including the judgment will be in English. The NCC applies Dutch procedural law and the NCC’s Rules of Procedure. The applicable substantive law is determined by reference to the rules of Dutch private international law.
In March 2019, the NCC Court in Summary Proceedings rendered its first judgment in which it granted permission for a private sale of pledged shares (a debt for equity swap) instead of a public auction (ECLI:NL:RBAMS:2019:1637).
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