On February 22 2018 the Supreme Court delivered an important judgment regarding the relationship between:
- privileged creditors in the framework of reorganisation proceedings; and
- secured creditors in the event of a subsequent bankruptcy.
A company (debtor) involved in reorganisation proceedings is in principle not protected against new claims that originated after the company's request to open reorganisation proceedings has already been granted by a court (for further details please see "Reorganisation proceedings: access and possibilities").
Such new claims can be the result of either a new contract or the continuation of an existing contract. For example, as regards rental agreements, claims for unpaid rent made before reorganisation proceedings are considered old claims, while rental claims made after the opening of such proceedings are new claims that can be enforced by the creditor if unpaid. This mechanism was implemented to encourage parties to continue old contracts and engage in new relationships to safeguard the continuation of the debtor's business activities.
If a company's reorganisation is unsuccessful and it is declared bankrupt, such new claims will be considered privileged claims in the framework of the subsequent bankruptcy if there is a close link or short period between the reorganisation and bankruptcy proceedings. Such privileged claims will in principle be paid out before any other claim, providing them with extra priority.
In a bankruptcy, privileged claims will be confronted with other secured claims (eg, claims secured by a mortgage). In such a case, the privileged claim can only be paid out with revenue coming from the liquidation of the asset underlying the secured claim if the prior services resulting in the privileged claim have contributed to the preservation of the secured asset in question. In this way, the legislature has tried to establish a fair balance between privileged claims resulting from reorganisation proceedings and (prior) secured claims.
If the security in question was established on all of the debtor's assets (eg, a general pledge on the debtor's business) this situation would result in difficulties in practice. In principle, it is possible for a privileged creditor to receive payment from the liquidation of the debtor's estate only if the creditor in question can prove that its services have safeguarded the economic value of the security (eg, the estate). Such evidence is difficult to provide and, without such evidence, can make the privilege attached to a new claim rather theoretical.
The Supreme Court recently delivered an important judgment in this regard. In the case brought before the court, the privileged creditor had assisted the debtor – during the latter's reorganisation proceedings – by shooting aerial footage during a cycling competition. The privileged creditor's subsequent invoices had gone unpaid.
After the debtor's bankruptcy, the privileged creditor's claim had to compete with the bank's, which was secured by a general pledge on the debtor's business.
The Court of Appeal ruled that:
- the privileged creditor had insufficiently demonstrated that its services were essential to the continuation of the debtor's activities;
- it was unclear that the services in question could not have been performed by other organisations; and
- no special capacities were necessary to perform these services.
Therefore, the Court of Appeal decided that the privileged creditor could not be paid with funds from assets covered by the bank's general pledge.
The Supreme Court quashed this judgment. It decided that – from these elements – it could not be excluded that the privileged creditor's services had – in general – contributed to the debtor's activities and the safeguarding of the assets supporting the secured creditor's claim.
If reorganisation proceedings are unsuccessful and lead to bankruptcy proceedings, creditors with new claims resulting from services performed during the reorganisation proceedings often find it difficult to receive payment of their privileged claim when it is in competition with a general pledge on the debtor's estate that is held by a bank.
The Supreme Court's recent judgment will help such privileged creditors to receive payment from the bankrupt estate. It could be argued, on the basis of this judgment, that a general contribution by these creditors to the continuation of the debtor's business could have been enough to receive payment, even if a (prior) security (pledge) had been established on the estate.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.