Bankruptcy

Bankruptcy is a judicial attachment of the debtor’s entire estate for the benefit of the general body of creditors. The district court declares it and appoints a trustee, who administers and liquidates the estate.

Legal basis

The Dutch Bankruptcy Act governs the procedure. Article 1 sets the test: the debtor must be in the position of having ceased to pay. Case law has developed this into the plurality requirement: there must be at least two creditors, one of whom holds a due and payable claim. Article 23 provides that from the day of the declaration the debtor loses the power to dispose of and administer the estate. Article 37 gives the trustee the choice whether or not to perform continuing reciprocal contracts. Article 68 charges the trustee with administration and liquidation; Article 69 allows creditors to challenge the trustee’s conduct before the supervisory judge. Ranking on distribution follows from Book 3 of the Civil Code and from the special preferences.

How it works in practice

A petition may be filed by a creditor, by the public prosecutor or by the debtor. Where a creditor petitions, the hearing is the moment to agree a payment arrangement or dispute the supporting claim; if plurality is disproved, the petition fails. Directors are well advised to have their records in order, because the trustee tests the board against Article 2:248 of the Civil Code and against the record-keeping duty of Article 2:10.

Where it goes wrong

Entrepreneurs wait too long before exploring alternatives, whereas a WHOA process or a controlled restart only stands a chance while there is still something to reorganise. A second error is selective payment of friendly creditors shortly before bankruptcy, which is unwound through the pauliana and can lead to personal liability. Third, creditors underestimate the value of their security: holders of a pledge or mortgage rank as separatists and are strong, ordinary creditors rarely are.