Bankruptcy petitions in the Netherlands: an option in debt recovery

When a debtor refuses to pay outstanding invoices, despite repeated reminders, demand letters and even settlement proposals, creditors may start looking for stronger measures. One option under Dutch law is filing a bankruptcy petition against the debtor. When can a creditor use this option, and what are the risks involved?

What is bankruptcy?

Bankruptcy is a legal procedure in which a court declares a debtor bankrupt because the debtor has ceased paying its debts. The purpose of bankruptcy is to identify the debtor’s assets, sell them where necessary and distribute the proceeds among all creditors in accordance with the order of priority established by law.

Requirements for bankruptcy

Under Dutch law, a debtor can only be declared bankrupt if it has ceased to pay its debts. This generally means that the debtor has multiple creditors and is no longer able or willing to meet its payment obligations.

A creditor filing a bankruptcy petition must therefore demonstrate:

• An outstanding and payable claim against the debtor.
• The existence of at least one additional creditor (a supporting claim).

The court does not need to establish that the debtor’s financial difficulties are permanent. It is sufficient if the debtor appears to be in a state of having ceased to pay its debts.

Although the threshold for establishing a supporting claim is relatively low, courts do require its existence to be sufficiently substantiated. The petitioning creditor should therefore provide concrete information about the legal basis and amount of the supporting claim, together with any available supporting documents, such as an invoice, correspondence or a written statement from the supporting creditor. Notably, courts have rejected petitions for lack of a properly substantiated supporting claim even when the debtor failed to appear at the hearing. Where possible, it is therefore advisable to identify and rely on more than one supporting creditor.

The bankruptcy procedure

Bankruptcy proceedings usually start when the creditor files a petition with the competent Dutch court.

The court will schedule a hearing at which both the creditor and the debtor can present their position. If the debtor disputes the petition, the court will assess whether the creditor’s claim is summarily established, whether at least one supporting claim exists and whether the debtor appears to have ceased paying its debts. If the statutory requirements are met, the court may declare the debtor bankrupt.

Upon declaring the debtor bankrupt, the court appoints a bankruptcy trustee (Dutch: curator). The trustee takes control of the debtor’s assets, investigates its financial affairs and determines which assets are available for distribution among the creditors.

A creditor must be represented by a lawyer when filing the petition. The petitioning creditor will therefore incur court fees and legal costs. These costs should be weighed against the expected recovery, particularly when the debtor appears to have few realisable assets.

What happens after the declaration of bankruptcy?

Once bankruptcy has been declared, unsecured creditors may generally no longer pursue individual enforcement against the debtor’s assets. Instead, the debtor’s available assets are dealt with collectively for the benefit of its creditors. The trustee will identify and realise the debtor’s assets and distribute any proceeds among the creditors in accordance with the applicable priority rules. This does not necessarily mean that all creditors will be paid in full. In many bankruptcies, only part of the outstanding debts can be recovered, and in some cases, there may be little or nothing paid to ordinary unsecured creditors.

The Act on Court Confirmation of Extrajudicial Restructuring Plans (WHOA)

A pending bankruptcy petition may be affected if the debtor initiates a restructuring process under the Court Approval of a Private Composition (Prevention of Insolvency) Act (Wet homologatie onderhands akkoord; WHOA). The WHOA enables a debtor in financial distress to propose a restructuring plan to its creditors outside formal bankruptcy proceedings. The plan may be aimed at preserving a viable business or achieving a controlled winding-up that offers creditors a better outcome than bankruptcy. Under certain conditions, the court may stay the bankruptcy proceedings to allow the restructuring process to continue.

If the restructuring process ends without a court-confirmed plan, or if the stay is lifted, the court may resume its consideration of the bankruptcy petition.

From payment reminders to legal action

As explained in our earlier blogs on debt recovery in the Netherlands, creditors will generally first request payment of the outstanding debt by sending payment reminders and a formal demand letter and, where appropriate, by attempting to negotiate a payment arrangement. If the debtor still fails to pay, the creditor may consider stronger measures, such as attachment, ordinary court proceedings or a bankruptcy petition.

Before filing a bankruptcy petition, the creditor may first warn the debtor that the petition will be filed if payment is not made within a specified period. In some cases, a draft petition may be enclosed to demonstrate that the creditor is prepared to proceed.

Why a bankruptcy petition can be effective

For many businesses, the threat of a bankruptcy petition is a serious matter. A bankruptcy filing may affect the debtor’s reputation, its relationships with suppliers and customers, and its ability to continue operating. As a result, the debtor may seek to resolve the matter before the court decides on the petition, by paying the outstanding debt or entering into a payment arrangement.

However, creditors should keep in mind that bankruptcy proceedings are not designed solely to collect a debt. The court will only declare a debtor bankrupt if the legal requirements are met. Even where these requirements are met, filing a petition may not be commercially sensible. If the debtor has few or no realisable assets or it is foreseeable that the assets will only cover the claims of the preferential creditors, the creditor may incur additional legal costs without receiving any distribution from the bankruptcy estate.

Ordinary court proceedings or a bankruptcy petition?

A bankruptcy petition is not suitable in every situation. Ordinary court proceedings will generally be more appropriate, if:

• the debtor genuinely disputes the claim. In those proceedings, the court can fully assess the parties’ positions and, where necessary, examine evidence. Such a claim can also be dealt with in bankruptcy proceedings, but in that case the trustee in bankruptcy will conduct the case at the expense of the bankrupt company’s assets. This will only reduce the chance that the debt can be recovered.
• there are no other creditors known.
• the debtor has enough identifiable assets that can be attached by a bailiff.

Ordinary court proceedings may result in an enforceable judgment against the debtor. However, during an insolvency a judgment cannot be enforced and if it is entered as a claim against the debtor, it will be dealt with by the trustee in bankruptcy like other claims. When the bankruptcy has ended, it is again possible to enforce the judgment.

A bankruptcy petition may be more appropriate where:

• the creditor’s claim is sufficiently clear;
• several creditors remain unpaid;
• the debtor appears to have ceased paying its debts; and
• there are indications of undisclosed assets or transactions that may have prejudiced creditors. A bankruptcy trustee has powers to investigate the debtor’s financial affairs and may, in certain circumstances, recover assets for the benefit of all creditors.

Unlike ordinary court proceedings, however, bankruptcy proceedings are aimed at the collective administration and distribution of the debtor’s assets and do not guarantee full recovery for the petitioning creditor. Any potential recovery will be distributed in accordance with the applicable priority rules. The process of recovery often takes more time than ordinary court proceedings.

If the debtor simply has no assets, neither a bankruptcy petition nor ordinary court proceedings will ordinarily improve the creditor’s position.

Debt recovery lawyer

Are you dealing with an unpaid debt and considering bankruptcy proceedings against a debtor? The experts of Russell Advocaten can assist you in assessing whether a bankruptcy petition is the appropriate strategy and guide you through the recovery process. Please contact us: