Summary

This dissertation is a study of the place of contracts in insolvency law. It centres on how insolvency law affects contracts entered into by a debtor before a statutory insolvency procedure is declared applicable to him, with a focus on bankruptcy proceedings. The study sets out to answer questions that can arise in this regard, or in any event to create a framework for answering such questions. It is also intended to make a contribution to the debate on the revision of this aspect of Dutch insolvency law. I have used comparative law as a source of inspiration, paying particular attention to the law of Belgium and the United States. For the same purpose I have also considered the relevant provisions from the draft Insolvency Bill, which was published on 1 November 2007.

After some introductory observations in the opening chapter, chapter 2 analyses the main characteristics of bankruptcy: the purpose of bankruptcy, the principle of equality of creditors (paritas creditorum), the legal status of the trustee in bankruptcy and the consequences of his acts and omissions, the interests of the creditors as a group (gezamenlijke schuldeisers), the interests of the bankrupt estate and the position of the debtor. I advocate, among other things, that the interests of the bankrupt estate should be treated as synonymous with those of the creditors as a group. I pay special attention to the fixation principle, to the legal relationship between creditors and to the growing importance of public interests in bankruptcy law, as all three factors play an important role in answering numerous questions related to the subject matter of this study.

The fixation principle is an intrinsic part of the system of the Dutch Bankruptcy Act (BA) (Faillissementswet) and is designed to protect the rights of recourse of the creditors for whom the bankruptcy has been initiated. For this purpose, both the assets and the liabilities are deemed to be 'fixed' as of the date of the bankruptcy. There are exceptions to the fixation principle on both the assets and liabilities side. A controversial issue is whether an exception to the fixation of liabilities applies in relation to claims that arise after the bankruptcy takes effect and are based on a pre-existing legal relationship, such as a continuing performance contract concluded by the debtor before the date of the bankruptcy. The position I take is that this question must be answered in the negative and that the fixation principle therefore applies in full to this category of obligations.

It can be inferred from the legislative history of the BA and from the case law of the Supreme Court (Hoge Raad) that relations between creditors in a bankruptcy are governed by the principles of reasonableness and fairness. In general, this implies that they must refrain among themselves from improper practices designed to improve their own position in the bankruptcy to the detriment of that of the creditors as a group. As a contractual counterparty of the debtor will also often be a creditor, its actions in bankruptcy proceedings must also as a rule comply with the standard referred to here.

A relatively new phenomenon in bankruptcy law is the growing importance attached to social considerations, such as business continuity and the preservation of jobs. In a series of judgments the Supreme Court has held that the trustee in bankruptcy should take such interests into account in his decisions and in certain circumstances may even give them priority over the interests of an individual creditor. In practice, however, the interests of the creditors as a group are not infrequently also subordinated to these social considerations. I argue that, in principle, the current framework of statute law and case law does not provide scope for this. Moreover, it is highly debatable whether it is even desirable for the interests of the creditors to be subordinated in this way to social considerations. It is hard to see why a public interest should be served at the expense of an arbitrary group of creditors.

Chapter 3 addresses the relationship between insolvency law and contract law. The confrontation between these categories of law is governed by four principles: (i) the continuity of a contract, (ii) the applicability of general contract law, (iii) the impossibility for a counterparty to enforce its contractual entitlements other than through the creditors' meeting, and (iv) the right of the trustee in bankruptcy to choose whether or not to perform a contract and the corresponding scope for the counterparty to compel the trustee to make this choice within a reasonable period. Next I go on to analyse the principle referred to at (ii).

After some general comments on the law of obligations I discuss the timehonoured rule (now laid down in Article 6:40 (a) of the Dutch Civil Code) that an obligor who is declared bankrupt is no longer competent to invoke a time clause attached to the obligation. Research shows that this rule seems to have been introduced into Dutch law and preserved more or less as something that is selfevident, without express consideration of the object of the rule and whether it is justified. I recommend that the rule be abolished as it has little or no added value in current law, is at odds with the restructuring function which is now one of the aims of bankruptcy proceedings, and also poses a threat to the right of the trustee in bankruptcy to choose whether or not to perform a contract.

I then go on to consider the applicability of general contract law in situations where only one of the parties is bound (or still bound) to perform at the time of the declaration of bankruptcy. If it is the counterparty who is under the obligation to perform, the influence of a bankruptcy is relatively small. However, the position is very different where only the debtor is subject to a duty to perform, because the counterparty is then confronted with the rule referred to at (iii), namely that neither the debtor nor his trustee in bankruptcy can be forced to perform an obligation. Moreover, the debtor is generally speaking unable to perform and the trustee in bankruptcy will seldom be prepared to do so in the cases referred to here. Consequently, the counterparty is then dependent on presenting his contractual entitlements to the bankruptcy trustee for validation. An example would be a claim for performance, a claim for damages in lieu of performance or, after rescission, a claim for the reversal of any performance (vordering tot ongedaan-making na ontbinding), in all cases combined with a claim for additional damages if grounds for this exist. Enforcement of a claim for performance is often (but not always) the appropriate course of action for the counterparty.

Finally, I analyse the situation where both parties are subject to a duty of performance on the date of the declaration of bankruptcy. I also consider the arrangement under section 37 BA which is intended to cater for this situation and under which the counterparty can give the trustee in bankruptcy a reasonable period within which to decide whether or not he will perform the contract. If the trustee in bankruptcy is not prepared to perform, he loses the right to claim performance (subsection 1). If he does decide to perform the contract he is required to provide security for that performance (subsection 2). I examine what section 37 BA adds to the possibilities available to the counterparty under general contract law to attain the objectives of this provision. The added value appears, at any rate in theory, to be considerable in cases where the trustee in bankruptcy declares himself willing to perform the contract and minimal in cases where he declines to do so.

The chapter concludes with an analysis of the best course of action for the counterparty if the trustee in bankruptcy refuses to perform the contract. In particular, I point to the potential risks associated with a rescission of the contract.

Chapter 4 deals with the provisions of section 37 BA and also with numerous other subjects not necessarily covered by section 37 but to some extent connected with it.

Various functions of section 37 BA can be identified. However, some of them have become less important over time or have altogether ceased to be relevant. For example, the old section 37, or in any event the explanatory notes on it, guaranteed that the counterparty was not required to perform the contract and then be fobbed off with at most a certain percentage of the consideration. As a result of the introduction of the general right in Dutch civil law to suspend performance, the counterparty of a bankrupt no longer needs section 37 BA for this purpose. The main function of this rule at the present time — assets in the bankrupt estate are often insufficient to even pay all the estate creditors — is that it gives the counterparty the certainty that if it continues to perform the contract it will actually receive the agreed performance or damages in lieu of performance and will not be left with an unrecoverable claim against the bankrupt estate.

When the current Dutch Civil Code was introduced, section 37 BA was amended in two respects. The main change concerned the consequences of a refusal by the trustee in bankruptcy to perform the contract. Under the old section 37 this refusal led to a partial rescission (termination ex nunc), whereas under the present section 37 it means that the trustee in bankruptcy cannot claim performance. The idea behind this is that the current Dutch Civil Code gives the counterparty the possibility of bringing about a rescission of the contract in a simple marmer, with exactly the same consequences as the automatic partial rescission under the old section 37 BA. Hence there is no longer any reason for these consequences to take effect automatically. It can now be left to the counterparty to choose what consequences it wishes to attach to a declaration by the trustee that he will not perform the contract.

In considering the rule under the current section 37 BA I first examine it from the perspective of the counterparty, with particular reference to the conditions for its application and the question of how it relates to the rules set out in sections 38-40 BA. I argue that only a case covered by the special provisions of section 38a BA provides grounds for invoking the general provisions of section 37. In situations covered by sections 38, 39 and 40 BA there is no scope for invoking section 37.

I next go on to consider section 37 BA from the perspective of the trustee in bankruptcy, for whom it reflects his right to choose whether or not to perform the contract. However, this right has been incorporated into the statutory system and is therefore not limited to agreements covered by the scope of section 37 BA. I discuss what factors play a role in the choice made by the trustee, what formalities the trustee must observe and to what extent he is personally liable if the choice turns out to be wrong.

If the trustee in bankruptcy chooses to perform a contract, he binds the estate to perform the resulting obligations. These obligations therefore obtain the status of an estate debt. This applies both to all obligations arising after the trustee indicates his willingness to perform the contract and to all obligations already existing at that time, even in so far as they predate the declaration of bankruptcy. The trustee in bankruptcy is also obliged to provide security for the performance of all these obligations. These far-reaching consequences of a declaration on the part of the trustee that the contract will be performed are objectionable in terms of principle and adversely affect his capacity to perform contracts in existence at the time of the declaration of bankruptcy. This in turn makes it more difficult for the trustee to continue the business and obtain the best result for the creditors as a group. I therefore make suggestions for amendments to deal with both these aspects of section 37 BA. I also argue that the trustee can declare of his own volition that he will perform a contract and that his willingness to do so need not necessarily be declared explicitly but may also be inferred from the circumstances.

If the trustee in bankruptcy does not declare in time that he is prepared to perform the contract after having been requested to do so by the counterparty, he loses the right to claim performance. I analyse what the potential consequences of this would be and suggest on the basis of my fmdings that the Toss of the right to claim performance should be dropped and that the consequences of a late declaration of willingness to perform should be governed exclusively by general contract law. It should also be possible for a declaration that the contract will not be performed to be made by the trustee outside the framework of section 37 BA, both expressly and tacitly. If the trustee is not willing to perform the contract, the counterparty usually has little option but to file its contractual claims for verification, the basis for which is set out in sections 26 and 37a BA. I also make a proposal for the amendment of section 37a BA.

I then examine contracts from which obligations arise that must be performed by the bankrupt in person, which is also the subject of section 37 (3) BA. The position of the counterparty under such a contract is often very unclear. I advocate that the counterparty should be able to hold the debtor accountable even dwing the bankruptcy and should be able to enforce such personal performance in law and with the help of enforcement measures, subject to the proviso that no recovery is possible against the bankrupt estate. The obligee of a personal obligation to be performed by the bankrupt should, in my view, however not be deemed competent to capitalise and verify these claims. If verification were to be allowed, this could substantially worsen the financial position of the debtor as a consequence of the bankruptcy. In my view, there is no justification for this. The same applies to the corresponding worsening of the position of the creditors as a group. If the debtor fails to perform the obligations properly or there are good reasons to believe that this will happen, the counterparty may enforce its resulting claim for compensation through the creditors' meeting.

The chapter closes with an analysis of the operation of section 37 BA in the extraordinary situation in which both contracting parties are declared bankrupt.

Chapter 5 examines one particular aspect of the trustee's right of choice, namely his right to opt for non-performance. The discussion centres on the judgment of the Dutch Supreme Court in the Nebula case and its potential consequences.1 The essence of this renowned judgment is that a trustee in bankruptcy has a right to default on all obligations entered into by the debtor before the date of bankruptcy. It follows that the trustee always has the right to choose not to perform the contract, and that in consequence the counterparty is dependent on the verification process. This applies even if the obligation requires the debtor to allow something or refrain from doing something. If goods belonging to the bankrupt estate are held by a third party pursuant to a right of use or in custody, the trustee in bankruptcy may in law terminate such use or custody even if the contract does not make provision for this, and the counterparty is then reliant on the verification meeting. If the trustee in bankruptcy breaches an obligation of the debtor to refrain from taking action, the counterparty does not as a rule acquire a claim against the estate. All claims under the law of obligations are settled through the process of verification and distribution, regardless of whether they concern an obligation to do or refrain from doing something.

In the Nebula judgment, however, the Supreme Court left scope for exceptions where this is a consequence of the law. As regards the most notable user agreements — contracts of lease and hire and licence agreements — and as regards obligations attached to the ownership or use of immovable property as set out in Article 6:252 of the Dutch Civil Code (kwalitatieve verplichtingen), I examine whether the law or the statutory system necessitates an exception. In the case of a lease agreement I argue that an exception is only justified for agreements which under mandatory law are subject to the rule that 'lease goes before sale'. This concerns in principle all agreements relating to the leasing of residential or business premises.2 If a landlord of residential or business premises is declared bankrupt, the trustee cannot deprive the tenant of his rights under the tenancy, other than in the exceptional case where, in the event of a sale, the trustee would not be bound by the rule 'lease goes before sale', for example on account of an attachment that predates the tenancy and has been subsumed by the general attachment considered to result from the bankruptcy proceedings themselves. Where movable property or property rights are hired out or unbuilt immovable property is leased, the interests of the hirer or lessee, as the case may be, are less deserving of protection and there are insufficient grounds to deprive a trustee of the right not to perform the contract. Nor, in my view, do rights of use and exploitation granted by licence (with the exception of certain compulsory licences) need to be respected by the trustee, irrespective of the nature of the intellectual property rights from which the licences are derived and irrespective of whether the licence is entitled to a degree of third-party effect. Owing to the major importance of licences to businesses, I recommend that a statutory provision be introduced under which a licence can be raised as a defence against the trustee in bankruptcy if the holder of the licence pays a market rate to the bankrupt estate, irrespective of what is determined by the contract in this respect. As regards an obligation attached to the ownership or use of immovable property as set out in Article 6:252 of the Dutch Civil Code, I conclude that there are insufficient grounds for holding the trustee bound by this, even where infringement of the obligation would mean that the stipulated transmission of rights is illusory from the outset.

At the end of the chapter I consider the question of whether it would be desirable to introduce a more far-reaching provision under which contracts could be terminated at the instigation of either the debtor or the trustee in bankruptcy. My conclusion is that this question should be answered in the affirmative and that a right of termination of this kind under insolvency law should take the form of a power for the trustee in bankruptcy to terminate agreements concluded by the debtor in all cases where he considers that this would serve the interests of the creditors as a group or the debtor. Owing to the far-reaching nature of such a power, the authorisation of the supervisory judge for the exercise of this power should be required after he has given the debtor and the counterparty the opportunity to express their views on the proposed termination.

In chapter 6 I examine the influence of bankruptcy on contracts and clauses from which no obligations arise. These include various contracts of a procedural law nature, debt assumption agreements (schuldoverneming), contract transfer agreements (contractsoverneming) and contracts for the waiver of a claim. I argue that the trustee in bankruptcy does not have the possibility of evading the operation of forum selection clauses, arbitration clauses and 'binding opinion' clauses. I also explain how such divergent procedures should be incorporated into the verification process. In addition, I argue that the trustee in bankruptcy is not bound by a mediation agreement, disregarding the question of whether there is scope for mediation at all if one of the parties does not wish to mediate. Choice-of-law clauses are binding on the trustee. The same is true of agreements made by the debtor establishing evidentiary presumptions, such as agreements which are intended to protect a seller who has supplied goods subject to a reservation of title from the consequences of `commixtion' (oneigenlijke vermenging) and the records clause frequently applied by banks (creating a rebuttable presumption that the bank's records are correct).

As regards both debt assumption and contract transfer agreements I show that, in principle, once all statutory requirements have been fulfilled the intended legal consequence takes effect immediately, and the agreement ceases to have any further effect. Where one of the parties is sub sequently declared bankrupt, the trustee in bankruptcy no longer has the possibility of reversing the legal position as it has already taken effect. However, if not all the conditions have yet been fulfilled or if the debt assumption or contract transfer agreement was entered into subject to a condition precedent or a time clause, the question may arise of how a bankruptcy of one of the parties occurring in the meantime affects the debt assumption or contract transfer. I conclude that the answer to this question is dependent on the position taken by the bankrupt in, and the requirements necessary to effect, the debt assumption or contract transfer. In some cases the bankruptcy does not affect the debt assumption or contract transfer and in other cases the fixation principle bars their completion.

Where a contract to waive a claim has been entered into subject to a condition precedent or time clause, I argue that there is nothing to prevent the intended legal situation coming into effect if the condition is fulfilled or, as the case may be, if the agreed date occurs after that on which the creditor becomes bankrupt. If the bankrupt has waived a future claim, the fixation principle prevents the effectuation of the waiver at the moment when the claim arises.

Chapter 7 focuses on the powers of the counterparty of a bankrupt to suspend performance and terminate contracts. Contractual clauses that purport to terminate the contract automatically in the event of bankruptcy or give the counterparty the power in such cases to terminate the contract unilaterally are common in practice. In its judgment in the BaByXL case the Supreme Court authorised such clauses, albeit subject to certain qualifications.3 I argue that these qualifications should be interpreted as meaning that if on the date of bankruptcy there has been no breach on the part of the debtor and the trustee in bankruptcy declares pursuant to the requirements of section 37 BA that he is prepared to perform the contract, termination of the contract would, in principle and with certain exceptions, be contrary to the requirements of reasonableness and fairness as set out in Article 6:248(2) Dutch Civil Code. If this analysis is correct, the added value of ipso facto termination clauses in bankruptcy over and above the instruments available to the counterparty under general law is limited.

I then go on to analyse the problem posed by creditors who are in a preferential position by virtue of their position of power in practice. Such creditors supply goods or services that are essential to the continuation of the business and manage to induce the trustee in bankruptcy to pay debts already existing on the date of bankruptcy outside the debt ranking rules in order to secure the continued supply of these goods or services. Generally, they do this by invoking a right to suspend performance because the debts have remained unpaid or by threatening to terminate the contract. Under the law as it stands the trustee in bankruptcy has only very limited means of breaking the counterparty's position of power in such cases. The obligation to continue to supply as contained in section 37b BA is of little value in practice since it is limited to utility suppliers, which have anyway already largely lost their position of power in bankruptcies owing to the liberalisation of the energy market.

In recent decades various other initiatives have been taken by the legislator to tackle the problem of these essential suppliers, but none of them has (yet) come to fruition. The draft Insolvency Bill contains a detailed arrangement under which virtually all suppliers of goods or services would, after the declaration of insolvency, be temporarily deprived of their right to suspend delivery or terminate the contract, while termination that takes place shortly before the declaration of insolvency would, in certain circumstances, be capable of being reversed. I explain what important innovations this arrangement contains and how it could be improved still further. In my view, the proposed legislation should in any event be extended to include a scheme under which the administrator would have the possibility in appropriate cases of applying to the court or — better still — to the supervisory judge to arrange for mandatory contract transfer in favour of the party relaunching the business.

Partly in response to the proposals of the Insolvency Law Committee, I then examine the controversial issue of whether it would be desirable to limit the suspension and termination rights of a lenden I argue that the committee's decision to exclude lenders from the application of the duty to continue supplying goods and services and not to replace it by another arrangement for the financing of the bankrupt estate is unfortunate. Finally, I explain my views on the introduction of a statutory scheme for estate credit along the lires of the American system.

The last chapter deals with some common contractual clauses. I discuss the following in succession: clauses that cause debts to become immediately due and payable in the event of bankruptcy, acceleration clauses, liquidated damages and penalty clauses, and clauses that detract from the creditor's right of recourse. I distinguish in this connection between clauses that entail an increase in the liabilities and those that result in a decrease in the assets in the event of a bankruptcy. I show that in some situations freedom of contract has to give way when confronted with the bankruptcy rules and the underlying principles, in particular if the relevant clause is intended to be implemented precisely in cases where one of the parties to the contract becomes insolvent.