This country-specific Q&A provides an overview of the legal framework and key issues surrounding restructuring and insolvency in The Netherlands.
This Q&A is part of the global guide to Restructuring & Insolvency.
For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/restructuring-insolvency/
What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
The types of security that can be granted under Dutch can be divided into a right of mortgage and a right of pledge. A right of mortgage is granted over registered assets (including immovable property), while a right of pledge is granted over all other assets.
The security right created over movable assets is a right of pledge. A pledge over movable assets can either be possessory or non-possessory, which is typically created by way of a private deed and registration thereof with the tax authorities.
A right of mortgage is the only form of security that can be granted over immovable property, registered ships and aircrafts. To create a mortgage, a deed must be executed before a civil law notary and must be registered in the public registers of the Netherlands land registry.
If the formalities regarding a right of pledge or right of mortgage are not complied with, the applicable security will not be valid.
What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?
The holder of a security right qualifies as a secured creditor. Secured creditors are in principle not affected by a suspension of payments or bankruptcy of the pledgor. The holder of security right may in these cases enforce its security rights as if there were no suspension of payments or bankruptcy. The exceptions to this are outlined below.
- Ad (i) Cooling off period: In bankruptcy of the pledgor a cooling off period (maximum of 4 months) may apply, during which the right to enforce is temporarily suspended.
- Ad (ii) Reasonable term: The trustee in bankruptcy may set a reasonable term to the mortgagee in which the mortgagee should complete enforcement of the mortgage. In case enforcement is not timely completed, the trustee may sell the property himself.
Enforcement can take place by way of (i) auction, (ii) private sale with court approval or (iii) only in case of movable assets, private sale with approval from the pledger. Depending on the type of asset, and the circumstances of the case, enforcement is usually completed in a period of 1-3 months.
What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?
A debtor who has ceased to pay may be declared bankrupt by a court order at his own application or at the request of one or more of his creditors. The basis for a bankruptcy adjudication is that the debtor has at least two creditors (one of them being the filing creditor, if the filing is involuntary) and that at least one of these two debts is currently due and payable. Dutch insolvency law does not have the concept of “balance sheet insolvency” as exists in other jurisdictions. The test instead is whether a debtor has ceased to pay.
Pursuant to the Dutch Bankruptcy Code a debtor who foresees that he will be unable to continue to pay his payable debts may apply for suspension of payments. Suspension of payments can also be requested by a debtor who foresees that he will not be able to pay off debts which will become payable in the future.
Dutch law does not contain a provision pursuant to which management of a debtor is obliged to file for insolvency. However, based on Dutch case law, management may be held liable if it continues the business and assumes new obligations on behalf of the debtor company knowing that the company will not be able to (timely) fulfil its obligations (and where there is insufficient recourse for creditors). More generally, a director may be held liable in case he continues the debtor company’s business while it is clear that such continuation serves no reasonable purpose anymore and only prejudices creditors’ possibilities to take recourse against the debtor company.
What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?
There are two main types of insolvency proceedings under Dutch law: bankruptcy proceedings and suspension of payments proceedings. Generally, a bankruptcy is aimed at the liquidation of the assets of the debtor for the benefit of his creditors, whereas a suspension of payments primarily serves to provide the debtor temporary relief against pressing creditors with a view to continuity of his business.
The most important effect of the bankruptcy is that the debtor loses the power to dispose of its assets. Only the trustee can dispose of the assets from then on.
In a suspension of payments, the debtor may no longer administer or dispose of his assets without the cooperation, authorisation or assistance of the administrator.
The court opens the bankruptcy proceedings at the application of the debtor or a creditor. At the time the bankruptcy is declared, a trustee (curator) and a bankruptcy judge, whose main task is to supervise the actions of the trustee, are appointed by the court. Furthermore, the court opens the suspension of payments proceedings at the application of the debtor. When a suspension of payments is granted, the court will also appoint a member of the local bar as administrator, and usually also a bankruptcy judge. In principle, the debtor has no control over who the court appoints as administrator or trustee.
Employees and shareholders have a limited role to play in insolvency procedures. If the insolvent debtor is an employer, employment contracts can be terminated by both the trustee and the employee.
There is no set time frame within which bankruptcy proceedings should be concluded. In practice various factors (e.g. complexity of the bankruptcy, agenda of the trustee) are relevant. Bankruptcy proceedings may therefore in practice last between one and several years. Given that a suspension of payments serves to provide the debtor temporary relief against pressing creditors, a suspension may be granted for a maximum period of 18 months and may be extended without limit at the request of the debtor for successive 18 months periods.
How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?
In bankruptcy, the assets of the bankrupt will form the bankruptcy estate, from which the trustee will make distributions to the creditors, pursuant to their statutory ranking. Below is a summary of the ranking of claims in a Dutch bankruptcy.
- Secured creditors: Secured creditors are in principle not affected by a bankruptcy insofar it concerns their recourse on the asset which is secured for their benefit.
- Estate and preferred creditors: Before the ordinary creditors, certain preferred creditors (designated by law) will be paid out of the bankruptcy estate in full (insofar possible). These preferred creditors include the Dutch Tax Authorities, any employees of the relevant entity and the trustee himself for his salary.
- Ordinary creditors: Claims of creditors rank pari passu, except for the estate, preferred and subordinated claims. This means that these ordinary creditors will be paid out of the available funds in the bankruptcy estate (after estate and preferred creditors are paid out), pro rata to the amount of their claim.
- Subordinated creditors: Whether a certain claim is subordinated will have to follow from the relevant agreement from which the claim follows. Subordinated claims will be paid after ordinary claims are fully paid. We do not have equitable subordination in the Netherlands, although there has been recent discussion on this.
- Providers of equity: If all creditors are paid in full and there are remaining funds in the bankruptcy estate, these will be distributed to equity providers of the entity. Clearly, any distribution to equity providers is very rare.
Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?
Dutch law contains provisions as a result of which certain transactions can be nullified by the trustee on the basis of fraudulent conveyance. A transaction may be nullified on the basis of fraudulent conveyance if:
- it has been voluntarily performed;
- it prejudices the available means of recovery of one or more creditors; and
- the debtor and beneficiary knew or should have known that the transaction would prejudice creditors.
The burden of proof regarding the above in principle rests on the trustee. A successful claim based on fraudulent conveyance renders the transaction void. Outside of bankruptcy, creditors can try to nullify transactions on similar grounds.
What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?
As a result of the bankruptcy all legal proceedings against the bankrupt are stayed and all attachments on the debtor's assets are terminated by operation of law. Secured creditors are in principle not affected by a bankruptcy (unless a cooling-off period is ordered by the bankruptcy court).
The EU Insolvency Regulation (nr. 2015/848) (the Insolvency Regulation) is applicable in the Netherlands. Therefore, the initiation of an insolvency proceeding by a Dutch court shall be recognized in all other EU Member States.
What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and/or is the debtor subject to supervision? What roles do the court and other stakeholders play?
The company can propose a consensual restructuring of its debts (i.e. outside of formal bankruptcy scenarios). However, the principle of freedom of contract means that creditors who are not willing to co-operate with the consensual restructuring can in principle not be forced to co-operate therewith. A large majority of creditors should therefore be willing to co-operate to ensure that a consensual restructuring is successful.
It is possible for a debtor, both in a suspension of payments or in a bankruptcy, to offer a composition to its (ordinary) creditors. A composition constitutes a proposal by the debtor to its creditors pursuant to which a partial payment is made on the claims of the creditors. As a result, the creditors are deemed to have waived the remaining part of their respective claims, effectively rendering the debtor debt free and in a position to continue its business. Once the composition is adopted by a majority vote of the recognised and admitted creditors, such majority representing a majority of the aggregate amount of admitted claims, and subsequently approved by the court, all creditors are bound by the terms of the composition, regardless whether they voted in favour or against the composition. All creditors are then effectively “crammed down”. As a result of the adopted and approved composition, the bankruptcy or the suspension of payments, as the case may be, will be terminated. We note that secured creditors cannot be bound by such composition, since they can foreclose on the secured assets regardless of the bankruptcy or suspension of payments.
Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?
There is no DiP-financing framework under Dutch law. Such financing is provided on a case by case basis and requires the cooperation of the trustee or administrator in case of suspension of payments.
Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?
Approval of a composition plan does not automatically release claims of non-debtor parties. In that respect, please note that it may be possible to release for example a guarantee in connection with a composition plan, however, while the non-debtor’s obligations would be extinguished in respect of those creditors who voted in favour of the composition plan, it remains uncertain under Dutch law to what extent the aforementioned guarantee obligations would be extinguished in respect of those creditors who did not vote in favour of the plan or abstained from voting.
Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities to they have? Are they permitted to retain advisers and, if so, how are they funded?
A creditors’ committee is not very common in Dutch bankruptcies. Under Dutch law, a bankruptcy court may, in the bankruptcy order or in a later order, appoint a provisional committee (voorlopige commissie) of between one and three creditors in order to advise the bankruptcy trustee. The court may appoint such provisional committee, if justified by the importance or the nature of the estate and as long as no definitive committee (definitieve commissie) has been appointed. Whether or not there will be a definitive committee is to be decided by the creditors during the verification meeting.
A creditors’ committee may require inspecting the books and documents relating to the bankruptcy at any time (i.e. a right to information). A creditors’ committee may at all times and at its own discretion advise the bankruptcy trustee on the course of action of the bankruptcy proceeding. Furthermore, a creditors’ committee is obliged to submit an advice under the following circumstances: (i) a proposed composition plan (faillissementsakkoord) or (ii) a proposed continuation of the business.
Dutch law does not provide for specific provisions as regards retaining advisers or funding of the expenditures.
How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any an ability for either party to disclaim the contract?
One of the principles of Dutch insolvency law is that contracts are in principle not affected by insolvency procedures. However, another important effect is that the bankrupt can no longer be forced to perform under a contract.
The trustee can (on behalf of the insolvent estate) demand performance from the debtor’s counterparty, if the debtor has performed his obligations prior to the commencement of bankruptcy proceedings.
Furthermore, the Bankruptcy Act deals with contracts that – at the time of declaration of bankruptcy – have not yet been (fully) performed by both the debtor and his counterparty. In that respect, the counterparty can request the trustee to notify him within a reasonable period of time whether the trustee shall perform the contract. If the trustee does not timely respond or in the event the trustee states that the liquidation estate is not bound by the contract, the trustee will lose his right to demand performance from the counterparty.
Under Dutch law, a retention of title, a right to terminate an agreement and a right of set-off are generally enforceable in bankruptcy.
What conditions apply to the sale of assets/the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?
In respect of the liquidation of the estate, the trustee is only entitled to sell unencumbered assets that are part of the bankrupt estate. The trustee is not entitled to sell assets that are owned by or secured in favour of a third party, unless with consent of such parties. The trustee is entitled to demand from a secured creditor to, within a reasonable period of time set by the trustee, exercise its rights with regard to the secured assets, for instance by foreclosing its right of pledge or right of mortgage, by failure of which that creditor loses its right to do so in favour of the trustee. In case of a suspension of payments the administrator does not have such possibility.
Under Dutch law any party may bid on pledged assets, including lenders or pledgees, in a public or private sale process with or without the approval of the court. Therefore, the pledgee is allowed to bid for pledged shares in a Dutch company and may do so by way of a credit bid (i.e. bidding by way of (effectively) set-off with the outstanding debt). We note that appropriation of shares by a pledgee is not permitted under Dutch law.
While pre-packaged deals are still theoretically possible, the European Court of Justice in the Estro bankruptcy ruled that the Dutch pre-pack process is not in line with the Transfer of Undertaking Directive. Therefore, all rights and obligations of employees of the bankrupt transferor of an undertaking are automatically transferred to the transferee in case of a sale through a pre-pack. This has material implications for Dutch pre-packs, as a potential buyer will be (very) reluctant to acquire an undertaking from a bankrupt transferor if (the rights and obligations of) the employees of such undertaking are automatically transferred.
What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?
Directors and officers of a company must act in the company’s best interest (taking into account stakeholder interest). If a company enters into a state of financial distress, its directors should attach more importance to the interests of the creditors with a view to ensure the availability of recourse of their claims.
The starting point is that only the company is liable for its obligations. However, there are various grounds on which a director can be held (personally) liable (see below).
- Liability towards company – In general, a director is liable for improper performance of his duties only in case of serious negligence. Improper performance of duties can consist of (refraining from) acting in violation of statutory provisions, the articles of association or if he has acted in a way which is obviously unreasonable/improper;
- Liability towards third parties – A director can be held liable on the basis of tort if it can be held he has acted seriously negligent and in particular if he has prejudiced creditors of the company;
- Liability in bankruptcy – Each director is jointly and severally liable for the shortfall of the bankruptcy estate if the management board has evidently improperly performed its duties and the improper management was an important cause of the bankruptcy. Special importance is attached to the duty of bookkeeping and the duty to timely publish the annual accounts.
The main rule under Dutch law is that a shareholder of a company is not personally liable for the obligations of the company since the company has legal personality. However, a shareholder can under exceptional circumstances be held liable on the basis of for instance tort (e.g. in the event a shareholder commits a tort with regard to creditors by infringing a duty of care).
A party (such as a controlling shareholder) who has acted as de facto director, could be held liable on the same grounds as a managing director.
Lender liability is relatively rare but cannot be excluded depending on the circumstances.
Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?
Restructuring or insolvency proceedings, in principle, do not lead to a release of stakeholder or director liability. Depending on the circumstances this could however occur.
Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency been adopted or is it under consideration in your country?
Foreign insolvency proceedings and the effects thereof will only be automatically recognised in the Netherlands if there is an enforcement treaty in place between the foreign country and the Netherlands.
The Insolvency Regulation is applicable in the Netherlands.
In the absence of a treaty, the starting point under Dutch law is that (non EU) foreign insolvency proceedings have ‘territorial effect’ and do not apply in the Netherlands. This entails not only that the attachment made on assets of the debtor as a consequence of foreign insolvency law does not extend to assets located in the Netherlands, but also that the effects of a foreign insolvency proceeding cannot be recognised in the Netherlands if the consequence thereof would be that unsatisfied creditors can no longer take recourse (during or after the insolvency proceeding) on assets of the debtor located in the Netherlands. It follows from case law that this principle of territoriality is generally seen as a rule of Dutch public policy and therefore any consequence of a foreign insolvency proceeding that would breach this principle, cannot be recognised in the Netherlands.
Please note that the Netherlands has no legislation based on the UNCITRAL Model law on Cross-border Insolvency.
Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?
Only in case their centre of main interest (COMI) is in the Netherlands.
How are groups of companies treated on the restructuring or insolvency of one of more members of that group? Is there scope for cooperation between office holders?
For the purposes of (amongst others) streamlining and coordination with respect to insolvency proceedings of group companies, the same person is often appointed as the trustee for, in principle, all members of the group. It is of relevance to note that even though the trustee could be the same person for various members of a corporate group, each proceeding remains distinct and separate from the other.
There are no specific Dutch rules on group insolvencies.
Is it a debtor or creditor friendly jurisdiction?
The Netherlands is generally perceived as a secured creditor friendly jurisdiction.
Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?
The trustee should primarily look after the interests of the creditors. However, the trustee could in specific circumstances take into considerations the interests of other stakeholders (e.g. preservation of employment). While trade unions could exercise some (political) pressure with respect to the preservation of employment, the State does not actively participate in a rescue operation. In that respect, we note that the State (e.g. Tax and Customs Administration) is generally one of the preferred creditors and therefore could have a role in a restructuring.
What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?
In the context of the legislative programme Reassessment Insolvency Law, various important developments can be identified. This concerns (amongst others) the following legislative proposals: Corporate Continuity Act I (CCA I) and Act On Dutch Court Confirmation Of Extrajudicial Restructuring Plans To Avert Bankruptcy (Wet homologatie onderhands akkoord; the WHOA).
The CCA I seeks to facilitate a structural and effective winding up of bankruptcies and/or aid the restart of commercially viable parts of the debtor’s business after bankruptcy. It allows the debtor to prepare and negotiate the transaction prior to bankruptcy, i.e. “precook” it as much as possible with the involvement of an intended trustee in a structured manner. Following the judgement of the European Court of Justice regarding the Estro pre-packed bankruptcy (see question 13), the implementation of the CCA I has been stayed until the Minister of Security and Justice has discussed the implications of the aforementioned judgement with the relevant stakeholders.
With respect to the Act On Dutch Court Confirmation Of Extrajudicial Restructuring Plans To Avert Bankruptcy (influenced by the English scheme of arrangement and the US Chapter 11), the possibility is introduced in the Netherlands for companies to offer a composition outside an insolvency proceeding. In this respect, the legislator intends improve the process regarding restructuring of problematic debts at companies outside of insolvency by making the process more flexible, faster and with minimal formalities, costs and uncertainties. Importantly, the WHOA will introduce the possibility to cram down secured creditors, which is currently missing from the Dutch restructuring and insolvency regime.