The Amsterdam District Court requested a preliminary ruling with regard to turnover tax incurred as a consequence of a sale taking place by way of summary execution (Amsterdam District Court 5 July 2017, ECLI:NL:RBAMS:2017:4726, answered by the Supreme Court on 15 December 2017, ECLI:NL:HR:2017:3149)
Geddes & Gilmore Retail B.V. and Geddes & Gilmore Wholesale B.V. (together referred to as G&G), two legal entities selling clothes for women and children, had established a first right of pledge on its retail stock for the benefit of Rabobank. At a certain point, Rabobank decided to levy execution. As it was likely that most proceeds would be generated by continuing to sell the goods in G&G's stores, Rabobank and G&G entered into an agreement on 9 April 2015 which enabled G&G to sell its clothes as usual, but by way of summary execution for the benefit of Rabobank.
On 14 April 2015, G&G was declared bankrupt. One week later, Rabobank and the bankruptcy trustee agreed that the clothes would continue to be sold by G&G in their stores by way of summary execution for the benefit of Rabobank. Additionally, Rabobank agreed to indemnify the bankrupt estate for turnover tax claims from the tax authorities to the extent such claims were estate debts. At the request of Rabobank, the structure of this summary execution was also approved by the court in preliminary relief proceedings on 24 April 2015.
Eventually, the summary execution generated proceeds of nearly EUR 1 million, including EUR 157,836 in turnover tax.
On 15 March 2016, the tax authorities claimed additional turnover tax from the bankrupt estate. In the subsequent proceedings, the bankruptcy trustee requested a declaratory decision that the turnover tax did not qualify as estate debt. In that context, the Amsterdam District Court requested a preliminary ruling from the Supreme Court on the following three questions:
(i) Does turnover tax incurred as a consequence of a sale by a pledgee according to section 3:251 Dutch Civil Code (DCC) qualify as an estate debt if the pledgee only sells privately to consumers?
(ii) Does it matter whether:
- the sale is based on an agreement entered into with the pledgor before bankruptcy;
- the sale is based on an agreement with the bankruptcy trustee after the pledgor was declared bankrupt;
- the sale is based on approval by the court in preliminary relief proceedings;
- the bankruptcy trustee is involved in the sale, for example by opening the pledgor's stores or providing personnel?
(iii) Does it matter whether and to what extent the bankruptcy trustee continues the company's activities within the meaning of section 98 or 173a of the Dutch Bankruptcy Act ("DBA")?
3. Legal framworkK
According to section 3:248 DCC, a pledgee is entitled to execution as of the date the pledgor is in default. The starting point is that such execution takes place publicly. However, pursuant to section 3:251 DCC, the pledgee is allowed to sell privately:
- with approval of the court in preliminary relief proceedings (subclause 1);
- by agreement between the pledgor and pledgee (subclause 2).
According to subclause 2, the pledgor and the pledgee can agree on various ways of execution. Therefore, it is also possible that the pledgor sells its assets as usual, which is actually a summary execution. This means that the pledgee is entitled to the proceeds regardless of the way the summary execution is structured. Since the pledgee (as separatist) can exercise its rights without being dependent on the bankruptcy trustee, the bankruptcy does not influence the execution. As discussed, the summary execution in the case at hand was based on an agreement between the pledgee and the pledgor (Rabobank and G&G) according to which the pledgor (G&G) sold its clothing in the usual course of its business. Rabobank was entitled to the proceeds.
3.2. Turnover tax
There is an obligation to pay turnover tax to the tax authorities following any sale of assets. Companies usually charge and collect 21% turnover tax from consumers (generally included in the purchase price) which the company pays monthly, quarterly or yearly to the tax authorities. In the event of a summary execution, this obligation does not shift to the pledgee or mortgage holder, nor are they obliged to hand over the turnover tax to the bankrupt estate. It has been settled in case law that the pledgee and the mortgage holder can have recourse against the turnover tax-part of the purchase price (Supreme Court 6 May 1983, NJ 1984/228, Rentekas).
There are a few exceptions to the principle outlined above. If the assets are sold by public auction, then the auctioneer is obliged to remit turnover tax. Furthermore, if the purchaser is a company, the purchaser is obliged to pay turnover tax to the tax authorities, which is called the reverse-charge mechanism (verleggingsregeling).
4. Supreme Court ruling
The Supreme Court quoted its decision of 19 April 2013, in which it ruled that there are only three categories of estate debts (Supreme Court ruling of 19 April 2013, ECLI:NL:HR:2013:BY6108, Koot Beheer/Tideman q.q.):
- pursuant to the law;
- because the legal relationship from which the debt arises has been entered into by the bankruptcy trustee in his capacity as trustee in bankruptcy; or
- the bankruptcy trustee acts in violation of an obligation connected with his capacity of bankruptcy trustee and the debt is a consequence thereof.
First of all, the obligation to pay turnover tax is not an estate debt pursuant to the law, since such provision does not exist. Secondly, as category 3 does not apply to this debt, the question in this case is whether the legal relationship from which the debt arises has been entered into by the bankruptcy trustee in his capacity as trustee in bankruptcy. According to the Supreme Court, this is not the case. The sale is based on the pledgee's right of summary execution and is not therefore a legal act of the bankruptcy trustee. This is not changed by the fact that the bankruptcy trustee has cooperated in any way. In conclusion, turnover tax incurred as a consequence of a sale by a pledgee according to section 3:251 DCC does not qualify as an estate debt if the pledgee only sells privately to consumers. In view of the foregoing, the first and second preliminary questions must be answered in the negative.
Finally, in response to the third preliminary question, the Supreme Court notes the following. All debts arising from the continuation of the company are estate debts. This also applies to turnover tax incurred by the bankruptcy trustee selling the debtor's assets in its usual course of business. However, if the assets are transferred as part of the pledgee's right of summary execution, such a sale is not based on a bankruptcy trustee's legal act. The same applies if the bankruptcy trustee cooperates in such execution and/or the assets are sold in the normal course of business under the supervision of the bankruptcy trustee. Consequently, to qualify as estate debts in the context of a pledgee's right to summary execution, it does not matter if the bankruptcy trustee continues the company's activities within the meaning of section 98 or 173a DBA.
It should be noted here, perhaps superfluously, that in anticipation of this Supreme Court ruling, the Dutch government introduced a legislative proposal (the Tax Plan 2018), which includes the newly constructed provision 42d of the Collection of State Taxes Act 1990. According to the Tax Plan 2018, a pledgee, mortgage holder or executor that has recourse against the turnover tax-part of a purchase will be jointly and severally liable towards the tax authorities for the turnover tax incurred as a consequence of the sale. In conformity with its preceding rulings and the Tax Plan 2018, the Supreme Court ruled that in such cases, the recourse action against the bankrupt entity will not qualify as an estate debt. These kind of claims can only be presented to the bankruptcy trustee for verification according to section 59 DBA.