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The Supreme Court rules on the ranking of general liquidation costs in the event of a wrongful collection by the receiver (curator) of secured claims

The Supreme Court rules on the ranking of general liquidation costs in the event of a wrongful collection by the receiver (curator) of secured claims

14.04.2016 NL law

In a recent judgment, the Dutch Supreme Court ruled that in the event of a bankruptcy whereby the bankruptcy receiver has wrongfully collected receivables which were pledged to a secured creditor and the total value of the assets of the bankrupt estate was insufficient to pay all debts, the bankruptcy receiver was allowed to recover its salary from the proceeds of that wrongful collection with priority over the claim of that secured creditor. 

The secured creditor was left with a claim on the bankrupt estate with the same priority it had on the basis of its secured position but there were insufficient liquidation proceeds left for full recovery of that claim.

Dutch Supreme Court 5 February 2016 (ECLI:NL:HR:2016:199)

One of the leading Dutch banks had provided a loan to a Dutch company under a credit agreement. The company had created a right of pledge over all of its (present and future) third party receivables in favor of the bank. When the Dutch company was declared bankrupt the bank informed the bankruptcy receiver of the right of pledge over the receivables and requested the bankruptcy receiver to provide the contact details of the debtors of the receivables for collection purposes. The bankruptcy receiver failed to provide the bank with part of the requested information, wrongfully arguing that receivables which had not yet been invoiced by the date of the bankruptcy had not been validly pledged to the bank.

The bank filed a claim against the bankruptcy receiver with the Noord-Nederland District Court demanding that the court rule, among other things, that the receivables which had not yet been invoiced were validly pledged to the bank and that the bankruptcy receiver was not entitled to collect them. Both the District Court and the Arnhem-Leeuwarden Court of Appeal upheld the bank's claim. However, both courts also held that the general liquidation costs (including the bankruptcy receiver's salary) were to be paid with priority over the claim of the bank from the proceeds of the bankrupt estate, including the proceeds from collection of the receivables by the bankruptcy receiver. Subsequently, the bank appealed to the Supreme Court stating that its claim should have priority over the salary claim of the bankruptcy receiver to ensure that the bankruptcy receiver would not benefit from the wrongful collection of the receivables.

In short, under Dutch bankruptcy law the general liquidation costs are recoverable from the proceeds of the bankrupt estate with priority over the claims of all creditors except for creditors holding a right of pledge or a right of mortgage, who can satisfy their claims directly from the proceeds of enforcement of such right of pledge or right of mortgage. In this case, the bank was prevented from enforcing its right of pledge over some of the receivables by the unauthorized actions of the bankruptcy receiver.

The Supreme Court has confirmed the strict order of priority in bankruptcy in various cases. An exception to these rules applies when a person without any legal relationship with the bankrupt person accidently pays an amount to the bankrupt estate. The Supreme Court ruled that a claim for repayment of such an amount is top of the priority list and must be satisfied immediately without any deductions for general liquidation costs or otherwise. Unfortunately for the bank, the Supreme Court did not accept in this case that a similar exception applied in relation to the bank's claim for recovery of the proceeds from collection of the pledged receivables. Instead the Supreme Court upheld the existing priority rules. It expressly considered that although the outcome of this ruling was undesirable (because the bankruptcy receiver benefited from its wrongful actions), the creation of a general exception to the existing priority rules was not justified for reasons of legal certainty (rechtszekerheid). The Supreme Court did note that in general a wrongful act by a bankruptcy receiver (such as, in certain circumstances, unauthorized collection of pledged receivables) can result in personal liability of the bankruptcy receiver for damages resulting from such wrongful act.

In such cases, the strict adherence to existing priority rules in bankruptcy can result in a seemingly unfair outcome. The holder of a right of pledge over receivables which are wrongfully collected by a bankruptcy receiver must accept that the bankruptcy receiver's salary is paid out of these proceeds while the remaining liquidation proceeds may be insufficient to satisfy the pledgee's claim. In that case, the pledgee can only attempt to recover its losses on the basis of a personal liability claim against the bankruptcy receiver. From the perspective of secured creditors the Supreme Court's ruling is unsatisfactory.

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