A bankruptcy application is a powerful tool for debt collection. If a debtor does not pay and the claim has not been disputed, a bankruptcy petition can often be used to collect a claim more quickly and cheaply. A petition for bankruptcy can be filed either by petitioner’s own request or at the request of one or more creditors. If there are reasons of public interest, the Public Prosecutor’s Office can also file for bankruptcy.
Why does a creditor file for bankruptcy?
If your debtor fails to pay and it does not look like that the outstanding invoice will be paid, you can file for your debtor’s bankruptcy. This increases the chance that the debt will (partly) be paid off. After all, a company in financial difficulties most of the time still has money in, for example, funds and real estate. In the event of bankruptcy, all of this will be sold for realisation of money to pay the outstanding invoices. A bankruptcy petition of a debtor is handled by a lawyer. A lawyer must ask the court to declare your debtor bankrupt. Your lawyer submit this with a bankruptcy petition. In most cases, the judge will decide directly at the court whether your debtor is declared bankrupt.
When do you apply?
You can file for bankruptcy if your debtor:
- Has 2 or more debts, 1 of which is claimable (the payment term has expired);
- Has 2 or more creditors; and
- Is in condition in which he has ceased to pay.
The question you often hear is whether an application for bankruptcy requires more than one creditor. The answer is no. A single creditor can also apply for the bankruptcy of a debtor. However, the bankruptcy can only be declared by the court if there are more creditors. These creditors do not necessarily have to be co-applicants. If an entrepreneur applies for the bankruptcy of his debtor, it is enough to prove during the processing that there are several creditors. We call this the ‘plurality requirement’. This can be done by statements of support from other creditors, or even by a declaration by the debtor that he is no longer able to pay his creditors. An applicant must therefore have ‘support claims’ in addition to his own claim. The court will verify this briefly and concisely.
Duration of bankruptcy proceedings
In general, the court hearing in bankruptcy proceedings takes place within 6 weeks of the petition being filed. The decision follows during the hearing or as soon as possible thereafter. During the hearing, the parties may be granted a delay of up to 8 weeks.
Costs of bankruptcy proceedings
For these proceedings you pay court fees in addition to the costs of a lawyer.
How does the bankruptcy procedure develop?
Bankruptcy proceedings start with the filing of a bankruptcy petition. Your lawyer starts the procedure by submitting a petition to the court asking for your debtor’s declaration of bankruptcy on your behalf. You are the petitioner.
The petition must be submitted to the court in the region where the debtor is domiciled. In order to apply for bankruptcy as a creditor, the debtor must have been summoned several times and eventually declared to be in default.
Invitation to the hearing
Within a few weeks, your lawyer will be invited by the court to attend the hearing. This notice will state when and where the hearing will take place. Your debtor will also be notified.
Does the debtor disagree with the bankruptcy petition? He or she can respond by submitting a written defence or an oral defence during the hearing.
It is not mandatory for the debtor to attend the hearing, but it is recommended. If a debtor does not appear, he can be declared bankrupt in a judgment in default.
You and/or your lawyer must appear at the hearing. If no one appears at the hearing the request may be rejected by the judge. The hearing is not public and the judge usually makes his decision during the hearing. If this is not possible, the decision will follow as soon as possible, usually within 1 or 2 weeks. The order will be sent to you and the debtor, and to the lawyers involved.
If you as a creditor, disagree with courts rejected decision, you can file an appeal.
If the court grants the request and declares the debtor bankrupt, the debtor can file for appeal. If the debtor appeals, the bankruptcy will take place anyway. With court’s decision:
- The debtor is immediately bankrupt;
- The judge appoints a liquidator; and
- The judge appoints a supervisory judge.
After the bankruptcy has been declared by the court, the (legal) person who has been declared bankrupt will lose the disposal and management of the assets and will be declared unauthorised. The liquidator is the only one who is still allowed to act from that moment on. The liquidator will act in place of the bankrupt (the person declared bankrupt), manage the liquidation of the bankruptcy estate and look after the interests of the creditors. In the event of major bankruptcies, several liquidators may be appointed. For some acts, the liquidator has to request permission from the supervisory judge, for example in the case of the dismissal of staff and the sale of household effects or assets.
In principle, any income the debtor receives during the bankruptcy, will be added to the assets. In practice, however, the liquidator does this in agreement with the debtor. If a private individual is declared bankrupt, it is important to know what is covered by the bankruptcy and what is not. First necessities and part of the income, for example, are not included in the bankruptcy. The debtor may also perform ordinary legal acts; but the bankrupt’s assets are not bound by this. Furthermore, the liquidator will make the court’s decision public by registering it at the bankruptcy registry and the Chamber of Commerce, and by placing an advertisement in a national newspaper. The bankruptcy registry will register the judgment in the Central Insolvency Register (CIR) and publish it in the Government Gazette. This is developed in order to give other possible creditors the opportunity to report the liquidator and to submit their claims.
The task of the supervisory judge in these proceedings is to supervise the process of managing and liquidating of the insolvent assets and the actions of the liquidator. On the recommendation of the supervisory judge, the court can order to hostage the bankrupt. The supervisory judge may also summon and hear witnesses. Together with the liquidator, the supervisory judge prepares the so-called verification meetings, at which he will act as chairman. The verification meeting takes place at the court and it is an event when the debt lists drawn up by the liquidator, will be established.
How will the assets be distributed?
The liquidator defines the order in which the creditors will be paid: the order of the ranking of creditors. How higher you are ranked, the greater the chance that you will be paid as a creditor. The order of ranking depends on the creditors type of debt claim.
First, as far as possible, the assets debts will be paid. This includes the liquidator’s salary, rent and salary after the bankruptcy date. The remaining balance, goes to the privileged claims, including government taxes and allowances. Any remainder goes to the unsecured (“ordinary”) creditors. Once the abovementioned creditors have been paid, any rest goes to the subordinated creditors. If there is still money left, it will be paid out to the shareholder(s) if it concerns an NV or a BV. In the bankruptcy of a natural person, the remainder goes to the bankrupt. However, this is an exceptional situation. In many cases, not much remains for the unsecured creditors let alone the bankrupt.
Separatists are creditors with:
- Mortgage law:
The business or residential property is collateral for the mortgage and the mortgage provider can claim thia collateral in case of non-payment.
- Right of pledge:
The bank has granted a credit with the condition that if no payment is made, it has the right of pledge, for example, on the business inventory or the stock.
The claim of a separatist (what the word already implies) is separate from a bankruptcy and can be claimed immediately, without first claiming it by a liquidator. However, liquidator may ask the separatist to wait for a reasonable period.
For you as a creditor, court’s decision has the following consequences:
- You can no longer seize the debtor yourself
- You or your lawyer will submit your claim with documentary evidence to the liquidator
- At the verification meeting, the final list of claims shall be drawn up
- You get paid according to the debts list of the liquidator
- A remaining debt can be collected after the bankruptcy
If the debtor is a natural person, it is in some cases possible that after the bankruptcy, the debtor submits a request to the court for conversion of the bankruptcy into debt restructuring.
For the debtor, court’s decision has the following consequences:
- Seizure of all assets (except necessities)
- The debtor loses the management and disposal of his assets
- The correspondence goes directly to the liquidator
How does bankruptcy procedure end?
Bankruptcy can end in the following ways:
- Liquidation due to lack of assets: If there are not enough assets to be able to pay out nothings other than the assets debts, the bankruptcy will be terminated due to lack of assets.
- Termination due to arrangement with creditors: The bankrupt can propose a one-off arrangement to the creditors. Such a proposal means that the bankrupt pays a percentage of the relevant claim, against which he is released from his debts for the rest of the claim.
- Cancellation because of the binding effect of the final distribution list: this is when the assets do not have sufficient volume to distribute the unsecured creditors, but the priority creditors can be paid (in part).
- Determination of court’s decision ruled by the decision of Court of Appeal
- Cancellation on request of the bankrupt and at the same time pronouncement of the application of the debt restructuring arrangement.
Please note: A natural person can also be sued again for the debts, even after the bankruptcy has been dissolved. If a verification meeting has taken place, the law provides opportunity in an execution, because the report of the verification meeting gives you the right for an execution title that can be enforced. In such case, you no longer need a verdict to execute. Of course, the question remains; what can still be obtained after a bankruptcy?
What happens if a debtor does not cooperate during the bankruptcy proceedings?
The debtor is obliged to cooperate and to provide the liquidator with all necessary information. This is the so-called ‘obligation to inform’. If the liquidator is being obstructed, he can take enforcement measures such as a bankruptcy interrogation or a hostage-taking in a Detention Center. If the debtor has performed certain acts before the declaration of bankruptcy, as a result of which creditors have less chance of reclaiming debts, the liquidator can undo these acts (‘bankruptcypauliana’). This must be a legal act which the debtor (the later bankrupt) performed without any obligation, before the declaration of bankruptcy, and by performing this act the debtor knew or should have known that this would result in disadvantage for the creditors.
In case of legal entity, if the liquidator finds evidence that the directors have misused the bankrupt legal entity, they may be held privately liable. Moreover, about this you can read in our previously written blog: Liability of directors in The Netherlands.
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