Right to reclaim
Retention of title
Dutch media recently reported that – contrary to many European countries – the number of bankruptcies in the Netherlands continues to decline. It is said that this difference lies mainly in the extent to which the countries provide state aid to entrepreneurs. However, some experts predict a wave of bankruptcies once the covid-19 pandemic comes to an end and state aid is withdrawn.
When faced with the bankruptcy of a Dutch company it can be important to act quickly and appropriately to safeguard the affected party's interests. This article describes a number of key aspects for dealing with the bankruptcy of a contract party, which can for instance be a supplier or a customer.
If a supply has been made to a company and that company goes bankrupt before the suppliers have been paid, the unpaid invoices can be submitted to the bankruptcy trustee, along with the applicable general terms and a copy of other arrangements that have been made in that regard, if any. Generally the trustee will not actually pay these invoices as in only approximately 10% of the bankruptcies in the Netherlands a (minor) distribution towards the regular creditors can be made (and only once the bankruptcy estate has been settled). However, insofar that the invoices remain unpaid it may then be possible to reclaim VAT (at least this will be the case for companies who have VAT payable in the Netherlands).
Sometimes more can be done. In some cases a right to reclaim can be exercised, which pursuant to Dutch law is a legal right of any party who has sold and supplied (movable) goods and subsequently has not been fully paid. In the event of the bankruptcy of the purchaser, the right to reclaim remains in effect and enables the supplier to reclaim the sold goods from the trustee. As a result, the purchase agreement will be terminated unless the trustee decides to pay for the goods. Generally, this would be the best scenario.
Besides the written requirement, some additional requirements need to be met for a right to reclaim to be successful:
- The supplier must in fact have the (legal) right to terminate the purchase agreement, the relevant goods must still be in the possession of the (bankrupt) purchaser and the goods must be in the condition in which they were delivered.
- The right of reclaim can only be exercised within six weeks after the purchase price has become due and payable, and only within 60 days after the goods have been delivered to the purchaser.
In other situations a retention of title arrangement may come to the rescue as goods delivered under retention of title may also be reclaimed from the trustee and as long as the purchase price remains unpaid this right does not expire. Retention of title may however not be effective anymore once the relevant goods have already been passed on to a third party by the purchaser.
Contrary to the right to reclaim, retention of title must have been agreed upon between the parties, usually in the supplier's general conditions for sale, and it goes without saying that such cannot be agreed upon once the goods have been supplied. The trustee will generally wish to see the relevant supply agreement and applicable conditions to be able to assess whether a retention of title actually applies. Further, the trustee may (try to) persuade the supplier in paying a contribution for the opportunity to reclaim the goods, which in most cases the supplier does not have to accept.
Pursuant to Dutch law, the principle of legal personality applies. This means that a company is an independent holder of rights and obligations, also having its own debts. Therefore, creditors can generally only claim from the company itself, and in case of a bankruptcy creditors cannot do more than to submit their claims with the bankruptcy trustee and possibly exercise some of the rights set out above (or maybe a security right, if applicable). In exceptional situations, however, the directors of a bankrupt company can be liable towards the company's creditors which are left unpaid.
The basis for a claim by an unpaid creditor against the director of a bankrupt company is general tort. As indicated, directors' liability can only be addressed in exceptional situations. For a director to be liable, Dutch case law requires that serious blame can be attributed to the director. In this context, unlawful acts by directors generally (only) occur when insolvency is imminent, being the moment in time that the director has (or should have) serious reasons to believe that the company will not be able to meet its obligations in the not too distant future.
Dutch case law on directors' liability is highly casuistic and in any event depends on the circumstances of the case, so the factual and legal basis for such a claim varies. For contractor or supplier and customer relationships, a general ground for directors' liability has been accepted in Dutch case law concerning the liability of the director who, on behalf of the company (customer), enters into a new obligation (like placing orders for the purchase of goods), while they knew or should have known that the company will not be able to fulfil that obligation (to make the relating payment) timely, nor be able to offer sufficient recourse. Generally, this will be the case when the company's bankruptcy is imminent, but in any case the director enters into obligations towards a counterparty. Dutch case law has ruled that in such event serious blame can be attributed to the director. As a result, the director can be personally liable for the damage of the relevant counterparty, who will usually be left with an unpaid claim and without sufficient remedy.
In relation to the director's liability ground set out above, a derivative version was developed in Dutch case law. This concerned the liability of the director of a contractor and supplier who sends advance invoices and presses for payment thereof, while he knew or should have known that the company will not be able to perform the related activities. Similar to the original liability ground, the same applies here in that liability will generally arise when the company's bankruptcy is imminent, and the director still sends advance invoices and presses for payment thereof. In such event, serious blame can be attributed to the director and they can be personally liable for the damage that is the result of this unlawful act.
The burden of proof of both these liability grounds, including the aspect of serious blame, however, lies with the creditor, which is considered as a substantial threshold to bring a director's liability action.
For the supplier who is left unpaid and whose counterparty goes bankrupt, the right to reclaim can be considered as a strong right, for instance taking precedence over a right of pledge, but the right to reclaim expires if it is not exercised quickly. The right of retention of title does not expire, but may not be effective anymore when the relevant goods have already been passed on to a third party. When facing the bankruptcy of a contractor, supplier or a customer, swift action may therefore be required. If not, the only option left may be to submit the unpaid invoices with the trustee and possibly seek recourse from the director of the company. But the latter can be a long shot in some cases, as the burden of proof lies with the creditor and the requirement of an unlawful act and serious blame of the director can be hard to prove (but not impossible).
For further information on this topic please contact Ben Reinders at AKD by telephone (+31 88 253 5000) or email ([email protected]). The AKD website can be accessed at www.akd.eu.