Ranking of bankruptcy trustee’s expenses not prejudiced by unlawful act

On 5 February 2016 the Dutch Supreme Court ruled that the fact that a trustee in bankruptcy unlawfully collected pledged receivables has no consequences for the ranking of his salary. That the trustee in this case would profit from his unlawful behaviour (his salary is the highest ranking claim in a bankruptcy) is undesirable, but not enough reason to change the ranking.

According to established Dutch case law, a trustee in bankruptcy must wait 14 days after bankruptcy has been declared before collecting pledged receivables. Only if the pledgee takes no action, can the trustee proceed. In this case the trustee in bankruptcy broke that rule. He disputed the right of pledge over the receivables and started collecting immediately.

When it was established that the receivables were indeed pledged, the trustee had to turn over the proceeds to the pledgee, resulting in a claim of the pledgee against the bankruptcy estate. By that time, however, it was clear that the pre-bankruptcy creditors of the company would receive no payment at all and that the creditors of the bankruptcy estate (boedelcrediteuren) would be ranked according to the rules of bankruptcy. According to these rules the salary of the trustee would rank above the claim of the pledgee to be reimbursed. The pledgee would end up with nothing.

The pledgee felt that this would mean that the trustee would profit from his own unlawful behaviour and sued the trustee in bankruptcy. The bank argued that its claim to be reimbursed should be ranked above that of the trustee.

The Supreme Court rejected this argument. It found that such a change in the ranking would not fit in the current framework for the settlement of insolvent bankruptcy estates. That the trustee profits, at the expense of the pledgee whose rights he violated, was “undesirable”, but not enough reason to create an exception to the ranking provided by law.

The Supreme Court concludes by stating that a trustee has many discretionary powers and is relatively free in the execution of these powers. However, if a hard and fast rule like the 14-day rule is violated, he does not act “in a manner that can be reasonably expected from a trustee with the required understanding and experience”, which means that he therefore opens himself up to possible liability in person (pro se). In this case, claims against the trustee pro se were dropped in the lower courts, but for future cases, that seems to be the preferred route by the Supreme Court for these cases.

A disputed right of pledge over receivables is not uncommon in the Netherlands. Usually the trustee and the pledgee settle this dispute by agreeing that the receivables are collected by the pledgee or a third party. The proceeds of the collected receivables will be kept in escrow. If the assets are indeed validly pledged, proceeds are turned over to the pledgee. If the assets are not validly pledged, they are turned over to the trustee, minus an agreed percentage for the collection.

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