Group settlement will, in principle, also stand in bankruptcy

On 15 November 2019, the Dutch Supreme Court issued a useful judgment on group settlement in bankruptcy. We will discuss this in more detail below.

What is group settlement?
It is not uncommon for several parties, for example group companies, to agree in writing that claims can be settled among those parties. If, for example, there is a group of three or more companies, they can agree that their mutual claims and debts will be settled among each other. Intercompany debts and receivables are then cancelled out. This set-off is also called group settlement. The arrangement may include other parties, such as suppliers and/or customers.

Security function
An important aspect of group settlement is security. If the parties have claims against each other, they can be confident that at least part of their claims is secured. When trying to recover their claim, they do not have to get in line with creditors, but can reduce their claims by the debt

Extended settlement possible
The legislator has included the provision on settlement in Section 6:127 of the Dutch Civil Code. Set-off is possible only if four requirements are met: Debtors may set off if (i) they have claims (ii) that correspond with debts to the same counterparty and (iii) they are authorized to both pay the debt and (iv) to enforce payment of the claim. This means that parties may settle only if they are reciprocal creditors and debtors. But because this is a regulatory provision, parties can extend, limit or exclude the power to set off. The parties can, for instance, extend the settlement to include the so-called group settlement, which can then also be invoked against pledgees or attaching parties. As it can also have legal consequences for other parties, group settlement has become a well-known structure.

Also in bankruptcy?
For a long time, it was unclear whether group settlement would also hold up if one of the parties to the group settlement were to go bankrupt. Settlement in bankruptcy is regulated by Section 53 Bankruptcy Act and the question is whether the reciprocity requirement applies here or that - just like outside bankruptcy - group settlement should also be possible. In other words, can group settlement - agreed before the date of the bankruptcy - also be invoked against bankruptcy trustees (as liquidators of the bankrupt estate) or pledgees of the bankrupt?

On 15 November 2019, the Dutch Supreme Court issued a ruling that shows that group settlements also hold up in the event of bankruptcy of one of the parties to the agreement providing for settlement. However, an important nuance of the Dutch Supreme Court is and will be that such debts and claims must still have arisen before the declaration of bankruptcy, or must result from actions performed with the bankrupt before the declaration of bankruptcy. This is a mandatory provision.

If the parties have agreed on group settlement, they can proceed with settlement – also in the event of bankruptcy - as long as the aforementioned mandatory legal requirement is met. For example, if a group company has a debt to a bankrupt, while another group company has a claim against that same bankrupt, that claim and that debt can be set off against each other. This would also affect, for example, a pledgee confronted with a lower pledged claim. Please note that such agreements must remain outside the scope of applications to set aside a fraudulent preference (it is risky if these set-off arrangements are made with bankruptcy in sight) and a debt position may not have arisen if claims and debts have been assumed in bad faith. In bankruptcy these agreements can of course no longer be made.

We will be happy to advise you on this subject in more detail.  Please contact us if you would like our advice for your specific situation.