How to mitigate your damage in a bankruptcy situation

The economic consequences of the covid-19 outbreak in Europe are of an unprecedented nature. Although a majority of European governments, such as the Netherlands (please see our dedicated covid-19 desk for the latest updates on these measures), have implemented various measures to support corporate cash flow, given the magnitude of the economic shock and the temporary nature of the measures, a surge of insolvencies is expected. Recently, Coface reported that according to its forecasting models it expects a sharp rise of insolvencies throughout Europe in the second half of 2020, and in 2021. For the Netherlands, Coface expects the number of insolvencies to increase with 36%.

An insolvency, such as a bankruptcy, has consequences for everybody involved, like vendors that have sold goods and have not been paid in full. Below we will highlight four ways for such vendors to mitigate their damage in bankruptcies.

1. Retention of title (eigendomsvoorbehoud)
Vendors may transfer sold goods subject to a retention of title. This means that the ownership of such goods is retained by the vendor until the purchase price has been in full. Until this full payment has been made the purchaser is not the legal owner of these goods. Important is that the vendor needs to demonstrate that the retention of title has been agreed upon with the purchaser (such retention of title is often part of the general terms and conditions of the vendor).

Also, it may be wise to dissolve the sale and purchase agreement and to demand that the retained goods will be separated from the other goods of the bankrupt estate. This may be a good strategy, in particular when there is a cooling down period. By doing so, a bankruptcy trustee is not entitled to sell and transfer the retained goods other than to hold the relevant vendor harmless.

2. Right of reclamation (recht van reclame)
Another and not well known way to mitigate damages for a vendor is to invoke the right of reclamation.  This right differs from the retention of title in that the right of reclamation does not need to be agreed upon with the purchaser. The right of reclamation has a statutory basis in Dutch law.  However, a vendor must invoke this right of reclamation as soon as possible.  This right will expire when two conditions have been fulfilled (i) six weeks have passed since the expiration of the related invoice and (ii) sixty days have passed since the delivery of the goods to the purchaser.

Also, it may be wise to demand that the reclaimed goods will be separated from the other goods of the bankrupt estate. This may be a good strategy, in particular when there is a cooling down period. By doing so, a bankruptcy trustee is not entitled to sell and transfer the reclaimed goods other than to hold the relevant vendor harmless.

3. Right of retention (retentierecht)
If the vendor of the unpaid goods has actual control over these goods (for instance when repairs needs to be done), also the right of retention may be invoked. The right of retention means that the specific good is not delivered by the vendor until the vendor’s claim is paid in full.

The right of retention is not affected by the bankruptcy of the debtor who owns the specific good on which the right of retention is exercised. A bankruptcy trustee, however, has, when confronted with a right of retention, in principle two options. He may claim the good(s) involved and sell these goods (please note that the party invoking the right of retention has priority over the proceeds of such sale). The other option for the bankruptcy trustee is to pay the outstanding claim of the party with the right of retention.

4. Liability of the management of the purchaser
A final way to mitigate any damages is to hold the management liable for the damage. This liability claim may be strengthened when the management has confirmed the creditworthiness of the purchaser on request of the vendor before the relevant transfers of sold goods have been made.

Furthermore, the management of a corporate debtor may be held personally liable if they allow the debtor to conclude an agreement while they knew or reasonably should have known that the debtor would not – within a reasonable time period – be able to meet its obligations arising from that agreement and that the other party would not have recourse against the debtor’s estate for damage incurred. Also, management may be held personally liable when procuring or permitting the debtor to default on its statutory and contractual obligations. Crucial is that the management may be hold personally liable when their behavior is negligent towards the relevant creditor and if this can be considered a sufficiently serious personal wrongdoing (voldoende persoonlijk ernstig verwijt).

Please note that the above is for general information purposes only. This information is not adapted to personal or specific circumstances and can therefore not be considered as being a personal or professional advice. No rights can be derived from the information.

If you have questions in connection with this alert or should you require tailor-made advice, please do not hesitate to contact us.