Restructuring and insolvency law in the Netherlands

  1.  What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?
  2. How are insolvency proceedings or restructuring proceedings initiated?
    1. Bankruptcy
    2. Suspension of payments
  3. What are the legal reasons for insolvency in your country?
  4. Which different types of restructuring / insolvency proceedings exist and what are their characteristics?
    1. Bankruptcy
    2. Suspension of payments
    3. WHOA (future legislation)
  5. Are there several types of creditors and what is the effect of a difference?
  6. Is there any obligation to initiate restructuring / insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?
  7. What are the main duties of the representative bodies in connection with restructuring / insolvency proceedings?
    1. Liability towards the company/Section 2:9 BW 
    2. Liability towards the liquidator/Sections 2:138 and 2:248 BW
    3. Liability towards the creditors/Section 6:162 BW 
  8. Are the representative bodies of a legal entity involved in restructuring / insolvency proceedings?
    1. Bankruptcy
    2. Suspension of payments
  9. What are the main duties of shareholders in connection with restructuring / insolvency proceedings?
    1. Balance Test
    2. Distribution Test
  10. Are the shareholders of a company involved in restructuring / insolvency proceedings?
  11. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?
  12. Does a legal framework for preventive restructuring exist yet?
  13. What is the average success rate after completed restructuring / insolvency proceedings?

1. What is the primary legislation governing insolvency and restructuring proceedings in your jurisdiction?

The Dutch Bankruptcy Act (Faillissementswet) and the European Regulation on Insolvency Proceedings are the primary legal frameworks governing insolvency proceedings in the Netherlands. There is no legal basis to restructure financially distressed but viable businesses outside of insolvency in the Netherlands. 

It is expected that an out-of-court restructuring instrument, the WHOA, will come into force in the coming months. This restructuring proceeding combines elements of the US’s Chapter 11 procedure and England’s Scheme of Arrangement

2. How are insolvency proceedings or restructuring proceedings initiated?

Insolvency proceedings applicable to companies in the Netherlands are bankruptcy and a suspension of payments. 

Bankruptcy

Bankruptcy proceedings focus primarily on liquidation of the debtor’s assets. Both the insolvent company or a creditor can file for bankruptcy.

Suspension of payments

The aim of a suspension of payments is business continuation. Suspension of payments can only be requested by the insolvent debtor. 

A restructuring outside formal insolvency can only be achieved in the Netherlands at present on a consensual basis, with the consent of all affected creditors. Each creditor can therefore frustrate the process by refusing to accept the proposed restructuring plan. Forcing a dissenting creditor into a restructuring is almost impossible. Therefore this restructuring tool is hardly ever successful. A suspension of payments provides temporary relief against unsecured, non-preferential creditors only, provided there is a reasonable prospect that the company is viable by being able to (partially) compensate its creditors. A suspension of payments has proven to be an ineffective instrument to restructure the debts of a company as it does not affect the rights of secured or preferential creditors. 

The new restructuring framework, the WHOA, is a procedure which can be opposed by dissenting creditors and can lead to a creditor cramdown outside of insolvency. 

In order to file for bankruptcy the following conditions must be met:

  • there must be at least two debts, of which one is overdue
  • the debtor must have stopped paying its debts.

4. Which different types of restructuring / insolvency proceedings exist and what are their characteristics?

Bankruptcy

Bankruptcy can be considered as a general statutory seizure of the debtor’s assets, followed by liquidation of these assets. A trustee is appointed by the court upon commencement of a bankruptcy. This trustee is in charge of the liquidation of the bankrupt estate. 

Suspension of payments

Suspension of payments is a proceeding that only provides temporary relief against ordinary, unsecured creditors of the debtor. Only the debtor itself can file for a suspension of payments. During a suspension of payments the debtor’s business will be managed jointly by the debtor and a court-appointed administrator. As practice has shown, a suspension of payments is hardly ever successful and the majority of suspensions of payments are converted into bankruptcies.

WHOA (future legislation)

The WHOA scheme provides an instrument to Dutch and foreign debtors to effectively and efficiently restructure their debts through a compulsory composition with creditors and shareholders outside of formal insolvency proceedings.

5. Are there several types of creditors and what is the effect of a difference?

  • Estate creditors: arise following the commencement of bankruptcy and ensue from either statutory provisions or from legal acts by the trustee; these claims have priority over other claims
  • Secured creditors, i.e. creditors with security rights (separatisten): can enforce their rights during bankruptcy as if bankruptcy had not been commenced
  • Preferential creditors: preferential rights create a preference regarding the distribution of proceeds of the liquidation. The claims of this group of creditors rank higher than those of unsecured creditors. Preferential creditors are:
    • UWV (Employee Insurance Agency)
    • Tax & Customs Administration
    • employees with a wage claim before bankruptcy. 
  • Unsecured or ordinary creditors: will only receive payment if there are sufficient proceeds remaining after all the creditors with higher ranks have received payment. 

6. Is there any obligation to initiate restructuring / insolvency proceedings? For whom does this obligation exist and under what conditions? What are the consequences if this obligation is violated?

There is no formal obligation to file for bankruptcy. However it might be advisable to file for bankruptcy to avoid directors’ liability: this might be invoked if the insolvent company continues business and enters into new contracts when knowing the company cannot fulfill its payment obligations, or when selective payments are being made to specific creditors.

7. What are the main duties of the representative bodies in connection with restructuring / insolvency proceedings?

According to Dutch law, when performing their tasks, all directors must act in the interest of the company and its business, which implies that the board of directors should take into account the interests of all stakeholders (shareholders, creditors, employees etc.). Directors can be held liable in the cases described below:

Liability towards the company/Section 2:9 BW 

Each managing director is obliged to fulfil his/her task towards the company adequately. Pursuant to Section 2:9(2) DCC, the legal entity may hold its directors liable for improper management. In practice, this only occurs in exceptional situations. The criterion for improper management is that no prudent director would have acted that way in the same circumstances. Also, director(s) must be seriously to blame (ernstig verwijt) for the improper management.

Liability towards the liquidator/Sections 2:138 and 2:248 BW

Directors may also face a claim filed by the bankruptcy trustee representing the interests of the creditors collectively. Sections 2:138 and 2:248 BW offer the trustee specific grounds for liability of directors of public and private limited companies, and foundations and associations subject to corporate income tax. Under Section 2:138/248 BW, liability is presumed if a director violates the following statutory obligations: 

  • duty to maintain proper bookkeeping (Section 2:10 BW)
  • duty to publish financial statements in a timely manner (Section 2:394 BW). 

Provided that these conditions are satisfied, a director can be held jointly and severally liable for the deficit of the bankrupt estate, with the restriction that these type of claims can be filed only on the ground that the improper management took place during the three-year period preceding the company’s bankruptcy.

Liability towards the creditors/Section 6:162 BW 

A managing director can be externally liable towards creditors for a wrongful act. The managing director is only liable in the situation that he/she can be attributed serious, personal blame (ernstig verwijt). In Ontvanger v. Roelofsen, the Supreme Court distinguished two categories of wrongful acts that may give rise to ‘serious reproach’:

  • the first involves a director who enters into a new obligation on behalf of the company while he/she knows, or should have known, that the company will not be able to meet that obligation in a timely manner (e.g. insufficient liquidity) and is unable to provide sufficient recourse (e.g. insufficient solvency) 
  • the second concerns a director who frustrates the payment of an outstanding amount and the possibility of recovery to the detriment of a creditor. 

For both categories of wrongful acts, liability is assumed if the director could have foreseen the damage to the creditors concerned.

Bankruptcy

During bankruptcy the company’s management loses control and is no longer able to dispose of its assets. A trustee is appointed and is in charge of liquidation of the bankrupt estate. The representative bodies are therefore not normally involved in the insolvency proceedings. However, they have duties of disclosure and cooperation in order to assist the trustee with the fulfilment of his/her duties.

Suspension of payments

During a suspension of payments the powers of the directors are shared with the administrator.

9. What are the main duties of shareholders in connection with restructuring / insolvency proceedings?

The general meeting of shareholders is exclusively authorised to resolve to distribute the profits that have been determined by the adoption of the annual accounts, as well as to resolve other distributions of assets. Distribution under Dutch Law consists of the following tests:

Balance Test

The general meeting can resolve to make a distribution in as far as the private limited company’s equity exceeds the reserves that have to be maintained by virtue of law and the articles of association. The deciding factor is the actual financial situation of the company at the moment the distribution (payment) is being made. 

Distribution Test

Once the general meeting has resolved to make a distribution in accordance with Dutch law, such a resolution will not have any effect and payment cannot be made as long as the company’s management has not approved it in a separate resolution.

The management board may only refuse to approve a proposed distribution if the management board knows, or should reasonably know, that the company cannot pursue the payment of its due and payable (short-term) debts after making the proposed distribution. The deciding factor is the financial situation of the company at the moment the distribution is being made.

If, after making the proposed distribution, the company is unable to pursue payment of its due and payable short-term debts, the managing directors who at the time of the distribution knew about, or should have reasonably foreseen, this situation are jointly and severally liable towards the private limited company to make up the deficit caused by the relevant distribution. Also the company can reclaim payment from a shareholder, as beneficiary of the distribution, if the shareholder knew, or should have reasonably foreseen, that the company would get into payment problems: the shareholder is jointly and severally liable to make up the deficit so caused.

10. Are the shareholders of a company involved in restructuring / insolvency proceedings?

The shareholders’ meeting needs to give its consent before the board can apply for bankruptcy. 

The approval of shareholders is not necessary in case of suspension of payments unless the consent of shareholders is stipulated in the articles of association or a shareholders’ agreement.

With regard to the WHOA, shareholders can participate in the procedure. Under the WHOA, shareholders’ rights can be affected by the restructuring plan.

11. Is a solvent liquidation of the company an alternative to regular insolvency proceedings?

A voluntary liquidation is possible in the situation that:

  • there are sufficient assets to pay the debts
  • there are insufficient assets, but all creditors explicitly agree with a voluntary liquidation.

A shareholders’ meeting of the company will have to resolve that the company be liquidated. If it is expected that there will be insufficient funds to pay the company’s debt after monetarising assets, the company should file for bankruptcy unless all the creditors agree with a liquidation outside formal insolvency. 

No.

13. What is the average success rate after completed restructuring / insolvency proceedings?

Unknown.

Jan Willem Bouman