Restructuring and insolvency law in the Netherlands

Winding-up proceedings

1. Bankruptcy

Bankruptcy proceedings focus primarily on the liquidation of debtor’s assets. Contrary to the suspension of payment, bankruptcy proceedings aim to achieve a liquidation of debtor’s assets on behalf of all the creditors.

Conditions for opening

Bankruptcy can be filed when a company cannot continue paying its debts. The court can declare the company bankrupt at the request of the company itself or at the request of one or more of the company’s creditors. The company must leave at least two creditors unpaid. There is no obligation on the company to file a request for bankruptcy when it foresees that payment of its debts will become impossible, an obligation common in other jurisdictions. However, the company does have the obligation to inform tax and social security authorities when it is unable to pay its debts. Additionally, company directors may be exposed to personal liability if they fail to take appropriate steps when the company is unable to pay its debts.

The bankruptcy effects a general attachment on all existing and future assets of the debtor on behalf of all creditors. The general attachment replaces any previous attachments of individual creditors. The rights of pledgees and mortgagees remain unaffected. Only the appointed bankruptcy trustee is entitled to act on behalf of the bankrupt debtor, who does not have the assets at its disposal.

Restructuring methods

As under the moratorium regime (set out below) the debtor has the opportunity to propose a composition to its creditors.

In some cases, a reorganization is prepared in detail prior to the company’s filing for bankruptcy. Once the company has been declared bankrupt and the trustee has been appointed, the company offers the trustee a reorganization plan by way of an asset-transaction. If planned carefully the trustee may not have many other options and could be inclined to cooperate. This type of reorganization will often be executed in close cooperation with the bank or financial institution which holds security rights on all major assets of the company. The secured creditors’ cooperation is therefore essential for the success of the reorganization.

However, most bankruptcies do not lead to restructuring of the company. In most cases, the bankruptcy trustee will sell all the assets of the company and the proceeds will be divided amongst the creditors in order of their priority. Creditors with preferential claims will be the first to receive payment. In many cases, there are no bankruptcy proceeds at all or the bankruptcy proceeds are not enough for full payment of all the creditors. In that situation, the proceedings terminate due to lack of assets or through finalizing the distribution list. The company will cease to exist if the bankruptcy proceedings end. Only when a composition with creditors can be arranged the company will continue to exist.

Pros and cons of this specific proceeding

Pros: One of the most important advantages of restructuring through a bankruptcy is that there will not be an obligation to maintain contracts, for example, with employees. Costs can be easily reduced.

Cons: Disadvantages are the ‘stigma’ of bankruptcy and the fact that the company’s’ activities will not be performed for a certain period of time.

Director’s liability

Director’s liability has to be taken into account as well. There are several ways that a director can be held personally liable for the company’s debt after it has entered into bankruptcy proceedings. A distinction should be made between liability towards the company and liability towards third parties.

If the company is unable to pay certain taxes or social premiums it must notify the relevant authorities of its inability. In the absence of such notification, or if the inability to pay is caused by apparent negligence of the management board, the managing directors are jointly and severally liable for the relevant taxes and social premiums. If the company is declared bankrupt, the managing directors are personally liable for the deficit in bankruptcy if the bankruptcy is, to a significant extent, caused by the apparent negligence of the management board during a three-year period prior to the date of bankruptcy. If the company has not kept proper financial records or has not filed its annual accounts with the trade register in a timely manner, there is a binding presumption that there has been apparent negligence and a further presumption that such apparent negligence has to a significant extent caused the bankruptcy.

An important legal basis for liability of the managing directors towards third parties is tort. Creditors of the company, for example, may hold a managing director liable on the basis of tort if he or she entered into a transaction on behalf of the company when he or she knew (or reasonably should have known) that the company would not be able to fulfil its obligations under that transaction.

Other proceedings

1. Suspension of payment

The suspension of payment, or moratorium, pursuant to the Dutch Bankruptcy Act is a general suspension of payment for ordinary (unsecured and non-preferential) creditors for a certain period of time. The suspension of payment is intended to give the debtor temporary relief from actions of certain categories of creditors and enable the debtor to propose a composition to its creditors. The procedure can be used to reorganize the business of the debtor and is intended to prevent bankruptcy proceedings.

Conditions for opening

The debtor will seek protection from the District Court of its registered seat to grant a suspension of payment for a certain period. The assistance of an attorney is required to file the petition. In the petition order, the debtor will state that, for the time being, it is not capable of paying its debts but that in the foreseeable future it expects to be able, at least partially, to pay its creditors.

Only the debtor can file a petition for suspension of payment. The petition should be signed by the directors of the debtor and the debtor’s attorney. It should include information regarding the creditors of the debtor and the debtor’s latest financial statements. The petition can also already include a proposal for a composition to the creditors.

The District Court will immediately grant a provisional suspension of payment for a limited period of time and an attorney will be appointed as administrator. The administrator must administer the debtor’s business during the moratorium and pay attention to the rights and interests of all the parties affected by the moratorium. When granting the provisional moratorium, the District Court sets a date for a hearing of creditors in order to decide whether to grant a definite moratorium order. At the meeting of creditors, a vote takes place on the final granting of the moratorium. If a certain majority is not reached, continuation of the moratorium will be refused and the District Court will generally declare the debtor bankrupt.

Restructuring methods

The moratorium suspends all litigation by unsecured and non-preferential creditors against the debtor and stops the enforcement of judgments by such creditors against the debtor. The debtor needs the cooperation and consent of the administrator to act in relation to its assets. On the other hand, if the administrator wants to act on behalf of the estate, he needs the cooperation of the debtor as well.

The most important restructuring method in the suspension of payment procedure is the composition with creditors. In principle, consent of all the creditors is required. The debtor cannot force a creditor to accept a proposal for a composition. Most of the time the composition implies a partial payment of the creditors’ debt and a discharge of the debtor for the remaining unpaid part of the debt. The Dutch Bankruptcy Act also offers the debtor the possibility of proposing a composition. When approved by at least 50% of the creditors holding at least 50% of the debtor’s debt, this majority can overrule a minority of creditors. Although the creditors with security rights and the creditors with preferential claims are not affected by the moratorium and are not entitled to vote for the composition, the debtor and administrator normally negotiate with these creditors. For example, tax and social security authorities are generally willing to accept the composition if they receive payment of twice the percentage that the ordinary creditors receive.

Success rate

Most of the time, the suspension of payment will not be the restructuring method that companies desire. Most suspensions of payment are followed by formal bankruptcy proceedings. In general, the suspension of payment is not to be considered successful at all.

Pros and cons of this specific proceeding

Pros: One of the most important advantages of the suspension of payment is, when it can be realized, the possibility to offer creditors a composition.

Cons: The main disadvantage of the suspension of payment is that it only offers protection against the claims and actions of unsecured and non-preferential creditors. Creditors with security rights (such as a right of pledge) and creditors with preferential claims (such as tax and employees rights) may still attempt to have their debts paid despite the suspension of payment.

Other restructuring techniques

Next to the bankruptcy and suspension of payment proceedings, an informal reorganization may be a viable restructuring technique. For example a private composition with creditors may be arranged. The bank or financial institution will have to cooperate and confidentiality is very important. All the creditors have to consent to a private composition or they are not bound by the composition.