The effect of a bankruptcy on ongoing agreements (duurovereenkomsten), and in particular the influence of an insolvency representative, is a primary concern for contracting parties. In its recent Berzona decision the Supreme Court ruled on the scope of the insolvency representative's control with respect to ongoing agreements.(1) This update examines the bankruptcy law framework, the prevailing views in this regard and the impact of the ruling - a surprising U-turn.
One of the principles of Dutch bankruptcy law is that an agreement is not affected by the bankruptcy of one of the parties. The Bankruptcy Act sets out a system for dealing with agreements that have not been completely performed by both parties. Under certain agreements a party may not owe actual performance, but may be obliged (passively) to permit an existing use. In a lease agreement, for example, the lessee is obliged to allow the quiet enjoyment of the real estate. The question that arises in bankruptcy is to what extent an insolvency representative is obliged to continue to allow such quiet enjoyment.
In 2006, in Nebula,(2) the Supreme Court ruled that even if a bankruptcy estate is required merely to permit an existing use, the insolvency representative is allowed to default on this obligation on the grounds that performance of the obligation would breach the principle of equality of creditors. The relevant counterparty is then left with an unsecured claim for damages against the bankruptcy estate. The Nebula ruling gained significant traction in Dutch legal literature. While some argued for a narrow interpretation in connection with the specifics of the case, others argued that the scope of the Nebula ruling was very broad and thus also affected complex legal arrangements such as licence agreements. In short, the prevailing view was that following Nebula, an insolvency representative had a right to default on an agreement. As a result, insolvency representatives invariably took the position that they were allowed to default on any passive obligation to permit certain uses to continue if it was in their interest to do so. Following the Nebula ruling, lower courts seem to have accepted this argument in a number of cases.
In July 2014 the Supreme Court issued a surprising ruling in Berzona, in which it addressed the scope of the Nebula ruling and concluded that its scope is not as wide as previously held in legal literature.
ABN AMRO Bank NV petitioned for the bankruptcy of its debtor Berzona BV. Pursuant to the Bankruptcy Act, a petitioner must show that the debtor has stopped paying its debts. In short, the petitioner should establish that the debtor has more than one outstanding claim to more than one creditor (the so-called 'plurality principle'). Among other things, ABN AMRO argued that Berzona as lessor owed a debt to its lessees, because it was obliged to allow them quiet enjoyment. The Supreme Court ruled that such a claim by a lessee for future quiet enjoyment is merely a potential and future claim, and thus cannot at this stage contribute to the plurality test. However, the Supreme Court also addressed the insolvency representative's ability to default on such obligation.
The Supreme Court ruled that, contrary to the common understanding in legal literature, an insolvency representative does not have the right actively to default on such obligation unless this is provided for by statute or in the relevant agreement. It concluded that this is in line with the stated principle that the bankruptcy does not affect ongoing agreements. The Supreme Court further stated that this position is not inconsistent with its Nebula ruling, because at its heart that dealt with a different matter. In Nebula, the Supreme Court clarified, the insolvency representative did not have to accept and perform under a (sub-lease) agreement entered into between third parties after the bankruptcy in relation to an asset belonging to the bankruptcy estate. Such performance would be in breach of the principle of equality of creditors.
Although the consistency between the Nebula and Berzona rulings may not be entirely clear, lessees and tenants can take comfort from Berzona that an insolvency representative's powers are less broad than previously thought. Unless statute or the relevant agreement so provides, an insolvency representative cannot actively default on any of the bankruptcy estate's obligations. The ruling thereby provides ample grounds for a party facing an overly active insolvency representative to prevent it from actively defaulting on the bankruptcy estate's obligations. By doing so, that party can retain its right to quiet enjoyment, at least for the time being.
For further information on this topic please contact Erwin Bos, Jelle Hofland or Ilse van Gasteren at Clifford Chance LLP by telephone (+31 20 711 9000), fax (+31 20 711 9999) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org).
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