Dutch Bankruptcy Act: bankruptcy, suspension and debt restructuring

The Dutch Bankruptcy Act (Faillissementswet, or Fw) sets out the main insolvency procedures in the Netherlands. Bankruptcy (faillissement) is a general attachment on all of the debtor’s assets for the benefit of all creditors: a trustee (curator) realises the estate and distributes the proceeds according to rank. Suspension of payments (surseance van betaling) gives a company that is in principle viable a temporary moratorium in which to reorganise. The statutory debt restructuring scheme for individuals (schuldsaneringsregeling natuurlijke personen, or Wsnp) ends, if the debtor meets the obligations, in a discharge of the remaining debts. Since 1 January 2021, the Act also contains a fourth route for businesses: a court-confirmed composition outside bankruptcy (WHOA).

A court declares a debtor bankrupt when the debtor has ceased to pay (article 1 Fw). In case law this requires at least two creditors, at least one of whom has a claim that is due and payable. That threshold is lower than most debtors expect. A petition by a single determined creditor, with a second claim behind it, is therefore a real risk rather than a theoretical one.

What does bankruptcy mean for you and your creditors?

Bankruptcy is a collective procedure: all of the debtor’s assets are attached at once for the benefit of all creditors. Outside bankruptcy, each creditor can still try to recover a claim on its own, using the rules of the Code of Civil Procedure (Wetboek van Burgerlijke Rechtsvordering, or Rv). That route is not always desirable, because creditors then race each other for the same assets.

A collective procedure saves many separate court cases to obtain an enforceable title and to enforce it. It also divides the debtor’s assets fairly among the creditors. With individual recovery there is no such order of ranking: the fastest creditor is paid first.

What happens once the bankruptcy is declared?

The debtor loses control of the estate immediately. The Bankruptcy Act contains a number of rules for this collective procedure. From the day of the declaration, the debtor loses by operation of law the power to dispose of and manage the assets that belong to the bankrupt estate (article 23 Fw). Creditors can no longer enforce their claims individually: enforcement measures that started before the bankruptcy end at once (article 33 Fw), and attachments lapse.

How do creditors get paid?

Creditors can only recover their claims by submitting them for verification (article 26 Fw). The court appoints a trustee, who is responsible for managing and liquidating the bankrupt estate for the benefit of the joint creditors (article 68 Fw). The trustee examines the claims that are submitted and, at the end of the procedure, distributes whatever the estate yields according to the ranking of the claims. Secured and preferential creditors therefore stand in a stronger position than ordinary unsecured creditors.

When can you apply for a suspension of payments?

You can apply when you foresee that you will not be able to continue paying your debts that are due (article 214 Fw). The aim of this procedure is different from bankruptcy. It does not distribute the debtor’s assets, but tries to preserve them. If a business can still get out of the red and avoid bankruptcy, it has to keep its assets together. That is why a suspension of payments is meant for a debtor who has not yet stopped paying, but who foresees that this will happen.

What does a suspension of payments change?

If the court grants the suspension, the debtor cannot be forced to pay the claims that fall under it. Enforcement is suspended and existing attachments, both precautionary and executory, lapse. The idea is that, with the pressure off, there is room to reorganise the business or to reach an arrangement with creditors.

Why does a suspension of payments often fail?

The main weakness is that the suspension does not bind every creditor. Creditors with security rights, such as a right of pledge, a mortgage or a right of retention, and creditors with a preferential claim on specific assets can still enforce their rights. An application for a suspension of payments can set off alarm bells for exactly these creditors and encourage them to demand payment or take back their collateral. In addition, the procedure gives the debtor only limited room to reorganise the workforce. As a result, a suspension of payments regularly ends in bankruptcy after all.

How does debt restructuring work for individuals?

The statutory debt restructuring scheme is the third procedure in the Act and resembles bankruptcy, but ends with a fresh start. A company that goes bankrupt is usually dissolved once the bankruptcy is wound up, so its creditors have no debtor left to pursue. That is not the case for an individual. Without a scheme, creditors could pursue a private person for the rest of his or her life. The debt restructuring scheme solves this: after a successful conclusion, the debtor can start again with a clean slate.

What does a clean slate mean?

A clean slate means that the remaining unpaid debts become natural obligations (article 358 Fw). Creditors can no longer enforce them through the courts, so they are in effect moral obligations only. To earn this clean slate, the debtor must do everything possible during the scheme to generate as much income as possible. That income and the debtor’s assets are then largely used for the creditors, much as in bankruptcy.

Why is good faith so important?

The court only admits a debtor to the scheme if the debtor acted in good faith in the five years before the request, as regards the way the debts arose or were left unpaid. The court weighs many circumstances, including whether the debts or the failure to pay them are blameworthy and how hard the debtor tried to pay. Good faith also matters during and after the scheme. If the debtor does not act in good faith during the scheme, the court can terminate it early (article 350 paragraph 3 Fw). Good faith at the end of the scheme is also a condition for granting, and keeping, the clean slate.

Is there an option for businesses outside bankruptcy?

Yes. Since 1 January 2021, a business facing insolvency can offer its creditors and shareholders a composition outside formal insolvency under the Act on Court Confirmation of Extrajudicial Restructuring Plans (Wet homologatie onderhands akkoord, or WHOA). Once the court has confirmed the composition, it also binds creditors who voted against it. The aim is to keep viable companies out of bankruptcy. Whether the WHOA, a suspension of payments or another route suits your business depends on your creditors, your security arrangements and your cash position.

In summary

The Bankruptcy Act offers liquidation procedures and procedures aimed at survival:

• Bankruptcy is a collective attachment on all of the debtor’s assets; a trustee liquidates the estate for the joint creditors, and creditors can only claim through verification.
• A debtor can be declared bankrupt once he or she has ceased to pay; in practice two creditors, one with a due claim, are enough.
• A suspension of payments pauses the payment obligations towards unsecured creditors, but secured and preferential creditors can still enforce their rights.
• The debt restructuring scheme is only open to individuals acting in good faith and can end in a clean slate.
• Businesses facing insolvency can also restructure outside bankruptcy through a court-confirmed composition under the WHOA.

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