Cross- border insolvencies in the Netherlands: a new proposal Author: Robert van Galen In: IBA edition SIRC Date: September 2008 The Dutch Bankruptcy Act presently in force is exactly the same age as the house I live in, having been enacted in 1896. My house is not an extremely old one by Amsterdam standards: the neighbourhood in which it is situated is not in the oldest part of the city and was developed later than the area where the famous canals are to be found. However, 112 years is fairly old for a Bankruptcy Act, and there has therefore been an ongoing discussion for the last few decades on how the legislation might be renewed. In 2003, the government set up a committee which was given the task of drawing up a new Act. Last November, after four years of deliberations, the committee published its draft for a new Insolvency Act, Chapter 10 of which deals with international insolvency law and is the subject of this article. Although the committee that drafted the 1896 legislation drew up provisions on the recognition of foreign bankruptcies, these provisions were omitted from the final Act. It was decided that the question of the extent to which foreign bankruptcies would be recognised in the Netherlands was to be dealt with primarily in treaties. The legislators of 1896 were of the opinion that the differences between the Dutch legal system and many other legal systems were too big to allow the inclusion of a set of generally applicable provisions in the Bankruptcy Act. Therefore, the only provisions on international law in the Act concern such matters as the obligation of creditors to pay monies to the estate if they have taken recourse abroad. At the judicial level, the Dutch Supreme Court has adhered to a restrictive view with respect to the recognition of foreign bankruptcies. In a judgment of 2 June 1967 (NJ 1968/16, Maître Hiret/Chiotakis), the court decided that in the absence of a bankruptcy treaty with the country where the bankruptcy is adjudicated, (i) assets located in the Netherlands are not included in the foreign bankruptcy estate and (ii) individual creditors are not prevented by the foreign bankruptcy from taking recourse against such assets. Thirty years later, the Supreme Court rendered a new judgment (31 May 1996, NJ 1998, 108, De Vleeschmeesters) in which it continued in the same vein. A debtor had been declared bankrupt in France and had received a discharge at the close of the bankruptcy. When, subsequently, old creditors of the debtor seized assets of the debtor located in the Netherlands, the Supreme Court decided that the discharge was not effective in the Netherlands and that therefore the individual creditors could still take recourse against the Dutch assets. The Netherlands did not have a bankruptcy treaty with France. However, in a third judgment (24 October 1997, NJ 1999, 316, Gustafsen q.q./Mosk) the Supreme Court did, to some extent, recognise a foreign bankruptcy in that it allowed a German bankruptcy trustee to invoke avoidance provisions against a Dutch party. There was also no bankruptcy treaty with Germany. The landscape in the Netherlands changed substantially when the European Insolvency Regulation ("EIR") entered into force on 31 May 2002 because, as a result, the Dutch courts were henceforth obliged to recognise insolvency proceedings opened in other EU member states. Chapter 10 of the draft Insolvency Act does not have to provide for the recognition of insolvency proceedings from other EU member states, because the recognition of such proceedings is already mandatory under the EIR. The well-known UNCITRAL Model Law on Cross-Border Insolvency was adopted by UNCITRAL in 1997. Conceptually, there are important differences between the Model Law and the European Insolvency Regulation. The EIR deals with the recognition of insolvency proceedings which have been opened in one of a specific set of states, the member states of the European Union. Between these states the principle of "Community trust" is axiomatic and this explains why main proceedings opened in one member state are to be recognised in all other member states and why such proceedings produce the same effects in the other member states as in the state in which they are opened, without further formalities. The EIR contains a public policy exception, but it must be construed narrowly (CJEC 2 May 2006, Eurofood). The point of departure is that if main proceedings are opened in one EU member state, these will have full force and effect in other member states and the relevant trustee can exercise all his powers in any of the latter states. The UNCITRAL Model Law differs from the EIR in that it is designed to apply to foreign proceedings from any other state, i.e. its applicability is not limited to proceedings opened in a defined set of states. It therefore contains more safeguards against the abuse of insolvency proceedings. Furthermore, under the Model Law it is primarily the law of the receiving state that determines what relief can be provided to the foreign trustee. The point of departure is that the foreign trustee is entitled to forms of relief that would be available to a local trustee. The UNCITRAL Model Law has been implemented in a number of countries, such as the United States of America, the United Kingdom, Australia, South Africa, Mexico and Japan. The committee that drafted the proposed new Dutch Insolvency Act elected to follow the UNCITRAL Model Law in some, but not all respects. According to the explanatory memorandum of the Act, the basic scheme is that with respect to recognition, the rules of the Model Law have been adopted, but that with respect to the powers of the foreign trustee and the law applicable to the recognised foreign proceedings, the rules of the EIR have been followed as much as possible. Subchapter 10.3 concerns the recognition of foreign bankruptcies and provisional measures. Article 10.3.1 provides that foreign insolvency proceedings can be recognised in the Netherlands at the request of the foreign trustee, the debtor or a creditor. Recognition proceedings must be conducted before the District Court of The Hague and recognition can be refused if (i) pursuant to internationally accepted standards the foreign court had no jurisdiction or (ii) the consequences of recognition are manifestly contrary to Dutch public policy. If the debtor has its centre of main interests in the state where the foreign proceedings have been opened, these proceedings are recognised as main proceedings. Such main proceedings include the debtor's assets in the Netherlands unless secondary proceedings are opened in the Netherlands. The abovementioned criteria for refusing recognition under the draft Insolvency Act are similar to the criteria for recognition under the UNCITRAL Model Law (Articles 6 and 17). Under both, the sole substantive criterion is that the foreign insolvency proceedings are not manifestly contrary to public policy. With respect to the consequences of recognition, the draft Insolvency Act adopts the approach of the EIR.1 Article 10.3.5 provides that if foreign proceedings are recognised as main proceedings, the foreign trustee can exercise in the Netherlands all powers conferred on him in the foreign proceedings. It also provides that upon recognition, the foreign trustee can take possession of the debtor's assets and move them out of the country (Article 10.3.5(2)). The effect of recognition under the UNCITRAL Model Law is less far-reaching: the individual actions of creditors are stayed and the debtor can no longer transfer, encumber or otherwise dispose of its assets (Article 20). This does not mean, however, that the foreign trustee can dispose of such assets. If the foreign trustee wishes to take any such action in the receiving state, he must ask the court in the receiving state for relief (Article 21; see in particular under (e)). Such relief is discretionary2. Article 22 (1) of the UNCITRAL Model Law provides that in granting relief under Article 21, the court must be satisfied that the interests of the creditors and other interested persons, including the debtor, are adequately protected. Moreover, Article 21(2) provides that the court may entrust the distribution of the debtor's assets to the foreign representative provided that the court is satisfied that the interests of creditors of the receiving state are adequately protected. The additional tests laid down in these two provisions give the court much more leeway to refuse to cooperate with the foreign trustee than if it can only refuse to do so on the grounds that the foreign proceedings are manifestly contrary to public policy. In my view, the lack of such additional tests in the draft Insolvency Act constitutes a serious flaw. Imagine a case in which there is doubt as to whether the administration of the insolvency will really be for the benefit of the creditors. It will be difficult to refuse recognition on the ground that the 1 Under the EIR, there are no recognition proceedings. Recognition is automatic. 2 Guide to Enactment of the Model Law, # 154 proceedings are manifestly contrary to public policy. Whereas under the draft Act recognition will automatically enable the foreign trustee to dispose of the assets in the Netherlands in spite of such doubt, under the UNCITRAL Model Law the debtor would first have to convince the court that such relief is justified. The UNCITRAL Model Law also contains an Article dealing with the availability of provisional relief before a decision on recognition has been taken (Article 19). In deciding whether to grant such relief, the court is to apply the same criteria as with respect to ordinary relief.