For IEEI in Athens last week, I gave 2 presentations. One on Business rescue in Europe and a short overview of the legislative developments re the Recalibration of Dutch Bankruptcy Act. See some notes below.
The Dutch Bankruptcy Act dates from 1896. It contains 3 proceedings: bankruptcy liquidation (faillissement), suspension of payments (surseance van betaling) and, since 1998, debt rescheduling natural persons (schuldsaneringsregeling natuurlijke personen).
Several efforts have been made, especially since the late 80s, to modernize the Act. As a result: consumer insolvency has been introduced, the bankruptcy liquidation proceedings suffer structurally (70%) from asset-less estates, the suspension of payments proceedings hardly are used, only as a stepping stone to liquidation (application only possible by the debtor; he starts too late).
A pre-draft for a fully new Insolvency Act, including legislative texts and Explanatory Notes, was developed between 2003-2007. I was one of the members of this Governmental Commission. It was received rather favourable, however, in 2011 the Minister of Security & Justice said: we can’t give it priority. Main reason: vested interests of financial community (banks) and the tax department of the government itself; lack of ambition.
Since 2012: Legislative Program Revision Bankruptcy Act, which rests on three pillars: combating insolvency fraud, modernizing insolvency procedures and strengthening the possibility for restructuring of companies. Presented as a three-pillar structure: the fraud pillar, the modernization pillar and the reorganization pillar. During a Conference October 2017 the approximately 10 speakers were ‘… all in all moderately positive about the legislative program’.
The fraud pillar included three topics that led to three separate laws.
On 1 July 2016, the Directors Disqualification Act and the Criminal Fraud Reform Act entered into force. Furthermore, on July 1, 2017 the Act on strengthening position of insolvency practitioner came into effect. The purpose of the Directors Disqualification Act is to impose a management ban and / or a ‘supervisory ban’ of up to five years on directors who are guilty of insolvency fraud or maladministration in the run-up to insolvency. The Law review on criminalization of insolvency fraud only changes the Code of Criminal Law. The purpose was to improve and strengthen the legal possibilities for criminal action against insolvency fraud.
Law strengthening position IP (curator). For the purpose of combating insolvency and combating the societal damage caused by insolvencies, it has been found necessary to (i) improve the information position of IPs by, in particular, restraining or imposing the duty of information and co-operation, (ii ) to clarify and strengthen the obligation to submit the bookkeeping and administration in bankruptcies, and (iii) by providing a follow-up procedure for cases in which the IP identifies ‘irregularities’ in an insolvency case.
A section Article 68(2) has been added, providing: ‘The IP (a) checks when managing and administering the liquidation of the insolvent estate whether or not irregularities have caused or also caused the insolvency bankruptcy, have made the liquidation of the insolvent estate more difficult or increased the deficit in the insolvency; b. informs the supervisory judge confidentially; and c. reports, if he or the supervisory judge considers this necessary, these irregularities to the competent authorities.’ This is a new statutory task that must be performed in the public interest and that deviates from the IP’s traditional task of serving the joint interest of the creditors.
This is the second pillar. The Act modernization insolvency proceedings has been accepted by the House of Representatives in February (as a ‘hammer-piece’ and is now in the Senate. This law aims to make the bankruptcy procedure more efficient, to make it suitable for modern means of communication, as well as to promote customization within the procedure.
The aim in drafting this law has been to facilitate the settlement of insolvencies by:
(a) better aligning the IP’s set of instruments with the requirements of modern digital time; this also includes improving the accessibility of information,
(b) giving the court more customization options in the settlement of an insolvency,
(c) bringing the insolvency procedure more into line with technical developments and possibilities, and
(d) improving building knowledge in the judiciary, by further specialization (including the appointment of 2 or more supervisory judges) and support in further developments in the implementation of insolvency legislation.
The changes fan out over the entire Bankruptcy Act. This law also introduces a ‘Standing’ Commission on Insolvency Law. The Insolvency Law Commission operates in the context of the Governmental Advisory Bodies Framework Act. That idea was more than ten years ago in art. 1.1.7 (‘Insolvency Council’) Pre-draft Insolvency law already put forward and the need to install such a commission has been expressed again by me (see Wessels, WPNR 2014/7021).
The idea behind legislative proposals in this pillar is to strengthen the reorganization of companies to prevent insolvencies as much as possible. Entrepreneurs should be encouraged to seek help or seek advice in a timely manner if there is a risk of payment default and ensure that measures are taken to facilitate reorganization, restructuring and restarting outside bankruptcy. In addition, measures would be taken to promote the continuation of the company in an inevitable bankruptcy liquidation and to speed up a restart of viable business units after insolvency.
Originally, this (now) third pillar was comprised of three legislative proposals under the recalibration proposals:
Law on the continuity of companies I. It deals with the introduction in the Bankruptcy Act of the possibility for the court to indicate ‘in silence’ before a possible insolvency who it will appoint as an IP (‘beoogd curator’). The proposal aims to provide a legal basis for what is now called the pre-pack or silent administration; In recent years, although lacking a clear statutory foundation, a pre-pack procedure has been developed in Dutch legal practice. A legislative proposal for the codification of this practice, the Continuity of Companies Act I (WCO I) is under review for enactment by the Senate.
WCO I will allow debtors in financial distress to prepare and attempt a silent restructuring of their businesses through a pre-pack procedure, allowing the debtor – which remains authorised to dispose of its assets – and a court-appointed trustee to jointly investigate and prepare an asset sale to be implemented immediately on the opening of formal insolvency proceedings.
Legislation concerning the formation of a compulsory agreement outside insolvency which will take shape with a proposal for a Continuity of Companies Act II (WCO II), now known as Act on the homologation of privately negotiated agreement.
Both the position of classes of secured and ordinary creditors and the rights of shareholders can be subjected to a composition plan under WCO II – even allowing for:
– an amendment of the debtor’s articles of association;
– the exclusions of pre-emptive rights of existing shareholders; and
– the issuance of new shares to allow for a debt-for-equity swap.
In statu nacendi is the Continuity of Companies Act III with various measures for the continuation of the company in insolvency, including a delivery obligation for suppliers of essential goods and services. This obligation to deliver is elaborated in a proposal for the Continuity of Enterprises Act III.
The Minister for Legal Protection (!) expects to finalise this legislative programme in 2019.