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Supreme Court: Fraudulent conveyance; knowledge of prejudice

Supreme Court: Fraudulent conveyance; knowledge of prejudice

Supreme Court: Fraudulent conveyance; knowledge of prejudice

02.08.2017 NL law

In a recent judgment, the Supreme Court ruled that both the debtor and any counterparty performing the legal act have knowledge of prejudice to creditors if, at the time of performing the legal act, the bankruptcy of the debtor and a shortfall in the bankruptcy estate is foreseeable. This judgment confirms the Supreme Court's decision of 22 December 2009 (ECLI:NL:HR:2009:BI8493).

Supreme Court 7 April 2017 (ECLI:NL:HR:2017:635).

After a graphic design company ran into financial difficulties, a reorganization was carried out to avoid a bankruptcy. As one of the company's creditors was not willing to accept a postponement of payments, one of the company's shareholders arranged for this creditor to receive a bank guarantee. In return, the shareholder was provided with a counter guarantee from the company. In addition, the shareholder was provided with a surety (borgtocht) from the company's financier for the performance of the obligations of the company under the counter guarantee and the company, its financier and the shareholder entered into a security surplus arrangement (overwaarde-arrangement). A few weeks later, the company was declared bankrupt. The creditor claimed under the bank guarantee. The financier of the bank guarantee had recourse against the shareholder. In turn, as the company was unable to pay, the shareholder claimed from the company's financier under the security surplus arrangement. The company's financier enforced its security over the assets of the company. This financier also invoked its right of recourse against the surplus security proceeds under the security surplus arrangement.

The bankruptcy trustee (curator) declared the legal acts of entering into the security surplus arrangement to be void under Section 42 of the Bankruptcy Act (Faillissementswet) on the basis of fraudulent conveyance (faillissementspauliana). In the legal proceedings that ensued, the bankruptcy trustee requested the court of first instance to rule, among other things, that these legal acts had been legally voided, which was rejected by the court. The Court of Appeal confirmed this judgment. It considered that the company and the shareholder (who, indirectly and in return for security under the security surplus agreement, provided the credit) did not have to reasonably foresee that the bankruptcy of the company was inevitable and that it could not be concluded that the reorganization was doomed to fail. Therefore, the Court of Appeal held that at the time of performing the legal acts the parties had no knowledge of prejudice within the meaning of Section 42 of the Bankruptcy Act.

The bankruptcy trustee lodged an appeal in cassation. The Supreme Court decided that the Court of Appeal had applied an incorrect standard to determine whether the parties to the security surplus arrangement had knowledge of prejudice. The Supreme Court ruled that the correct standard is whether at the time the parties entered into the security surplus arrangement, the bankruptcy of the company and a shortfall in the bankruptcy estate was foreseeable with a reasonable degree of probability. Furthermore, the Supreme Court confirmed that this standard equally applies to legal acts performed by parties seeking to avoid a bankruptcy through a financial reorganization.

The judgment serves as a reminder to borrowers and lenders taking measures to avoid bankruptcy. Legal acts performed by a company in financial difficulties and its counterparties may be scrutinized not only at the stage when bankruptcy of the company is inevitable but also at the stage when such bankruptcy is foreseeable with a reasonable degree of probability.

Team

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