In a recent judgment the Dutch Supreme Court ruled that the holder (an "Estate Claim Pledgee") of a right of pledge (an "Estate Claim Pledge") which secures one or more estate claims (each, a "Secured Estate Claim") is entitled to satisfy such claims out of the proceeds resulting from enforcement of such right of pledge ("Estate Claim Pledge Enforcement Proceeds") during the pledgor's bankruptcy provided that the claims have arisen from a legal relationship having come into existence prior to the bankruptcy.

Dutch Supreme Court 15 April 2016 (ECLI:NL:HR:2016:665)

The ruling actually addresses two questions. Firstly, to what extent is an Estate Claim Pledgee entitled to satisfy its Secured Estate Claims out of the Estate Claim Pledge Enforcement Proceeds during the pledgor's bankruptcy?Secondly, can the right of seizure by the tax authority of moveable assets located on the premises (bodemvoorrecht) of the bankrupt party be invoked against the holder of Secured Estate Claims in case the bankruptcy receiver claims surrender of the enforcement proceeds of the inventory subject to such right of seizure?

A Dutch international brewing company leased a  building to a night club entertainment company. In 2008 the entertainment company granted the brewing company a right of pledge over its inventory as security for, among others, its obligations under the  lease. In 2011 the entertainment company was declared bankrupt. For some time the bankruptcy receiver continued the lease in order to facilitate an orderly restructuring of the night club business but ultimately the bankruptcy receiver agreed with the brewing company to terminate the lease given that a successful restructuring had at that time become unlikely to succeed. Subsequently the brewing company enforced its right of pledge over the inventory, realizing enforcement proceeds in an amount of EUR 50,000.

The bankruptcy receiver, representing the interests of the tax authority as preferential creditor claimed that the brewing company should transfer the enforcement proceeds to the bankrupt estate, arguing that an Estate Claim Pledgee is not entitled to satisfy the Secured Estate Claims out of Estate Claim Pledge Enforcement Proceeds but should instead transfer the Estate Claim Pledge Enforcement Proceeds to the bankrupt estate. In subsequent litigation the bankruptcy receiver's claims was dismissed by both the Amsterdam District Court and the Amsterdam Court of Appeal.

Following an appeal by the bankruptcy receiver, the Dutch Supreme Court ruled that an Estate Claim Pledgee is entitled to satisfy its Secured Estate Claims out of the Estate Claim Pledge Enforcement Proceeds during the pledgor's bankruptcy, provided that the Secured Estate Claims have arisen from a legal relationship which has come into existence prior to the date of bankruptcy. The first reason is that bankruptcy in itself does not affect contractual obligations. In the case at hand, the lease had remained intact for some time after the bankruptcy of the entertainment company, giving rise to the estate claims which fell within the scope of claims secured by the Estate Claim Pledge. The second reason is that lease claims arising after bankruptcy of the lessee qualify as estate claims for purposes of offering protection to the lessor. It would be inappropriate if a right of pledge securing those claims would become ineffective as a result of such qualification.

In respect of the second question, it should be noted that under general rules of Dutch bankruptcy law, a claim secured by a non-possessory right of pledge ranks lower than tax claims for which the tax authority can exercise itsbodemvoorrecht. In such cases a bankruptcy receiver is entitled to claim the enforcement proceeds from the pledgee for the benefit of the bankrupt estate and apply such enforcement proceeds towards the settlement of estate claims (including the bankruptcy receiver's salary). However, the Dutch Supreme Court considered that tax claims do not rank above estate claims and subsequently ruled that, given the fact that the Estate Claim Pledge validly secured the Estate Claim Pledgee's Secured Estate Claims, the bankruptcy receiver was not entitled to claim the Estate Claim Pledge Enforcement Proceeds from the Estate Claim Pledgee.

Given the reinforcement of their position we believe that the Supreme Court judgment will have a positive impact on the willingness of Estate Claim Pledgees to provide their cooperation to an orderly restructuring of the business of a bankrupt pledgor.

Source: Banking and Finance Update July 2016