Invalidation of agreements entered into by a bankruptcy trustee with the approval of the supervisory judge under Article 69 of the Bankruptcy Act?

NL Law

The Dutch Supreme Court handed down a judgment (ECLI:NL:HR:2023:1751) on 15 December 2023 clarifying whether agreements entered into by a bankruptcy trustee with the approval of the supervisory judge can be affected by an application under Article 69 of the Dutch Bankruptcy Act (DBA).

In the case in question, the estate included a house of considerable value. The supervisory judge allowed the bankruptcy trustee to sell the house privately rather than publicly (Article 176(1) DBA). The bankruptcy trustee offered the property for sale on the Dutch housing website at a target price of EUR 1.6 million. Initially, the trustee reached an agreement with the daughter of the bankrupt (the Daughter) to purchase the property for EUR 1.875 million. However, the sale did not go through, as the Daughter defaulted and remained in default. Then, the bankruptcy trustee received an offer of EUR 1.25 million from another interested party (the Buyer). The bankruptcy trustee accepted this offer with the supervisory judge’s approval, which approval is required by the DBA. Shortly thereafter, another interested party (the Competing Bidder) made an offer of EUR 1.225 million. As this offer was lower than the Buyer's offer, the supervisory judge did not reconsider his earlier approval. Consequently, the bankruptcy trustee entered into a purchase agreement with the Buyer. Subsequently, the Competing Bidder increased its offer to EUR 1.275 million. Although this bid was higher, the bankruptcy trustee rejected this offer as he had already entered into an agreement with the Buyer. 

The bankrupt did not agree with the bankruptcy trustee's decision to reject the Competing Bidder's offer and filed an application under Article 69 DBA requesting the supervisory judge, among other things, to order the bankruptcy trustee to dissolve (ontbinden) the agreement with the Buyer and to enter into an agreement with the Bidder instead. Article 69 DBA allows any creditor, a creditors' committee or a bankrupt by application to the supervisory judge to object to any act of the bankruptcy trustee or to request the judge to order the bankruptcy trustee to carry out or to refrain from carrying out certain acts. The supervisory judge rejected the bankrupt's application as he decided that Article 69 DBA does not provide a legal ground to dissolve an agreement that has been validly entered into by the bankruptcy trustee with the supervisory judge’s approval. 

Subsequently, the bankrupt appealed to the court. The court partly agreed with the bankrupt and ordered the bankruptcy trustee to dissolve the agreement with the Buyer and to start a new public and transparent sale and purchase procedure. The court found that the bankruptcy trustee had not sufficiently taken into account the importance of a competitive and transparent sales process in order to obtain the highest possible proceeds. It decided that the supervisory judge could also have reconsidered its approval of the agreement with the Buyer when it became apparent that there were other interested parties. The fact that a contract had already been entered into and the bankrupt estate might be liable for loss resulting from the dissolution of the contract did not make this any different, according to the court.

The bankruptcy trustee then appealed to the Supreme Court. He argued that an application under Article 69 DBA could not invalidate the bankruptcy trustee's commitment to a validly entered into agreement that has been approved by the supervisory judge. This appeal was successful. The Supreme Court confirmed that the binding effect of an agreement entered into by a bankruptcy trustee could not be reversed under Article 69 DBA (or on appeal under Article 67(1) DBA). This would be otherwise only if the requested order under Article 69 DBA resulted in the bankruptcy trustee exercising a power of dissolution conferred on him by law or by agreement. This is an understandable and satisfactory decision by the Supreme Court. A contrary decision would lead to legal uncertainty for parties entering into an agreement with a bankruptcy trustee and would most likely result in lower proceeds from sales transactions in estates. Furthermore, there is no legal justification for treating these agreements differently from similar agreements entered into outside a bankruptcy. 

This case shows that parties involved in a bankruptcy (such as creditors) have only a limited timeframe to influence possible sales transactions in an estate. When a contract has been entered into, their options to influence the bankruptcy acts in this respect are limited.