Declaration of bankruptcy and the principle of plurality

The legal framework behind bankruptcy

Declaration of bankruptcy is a measure with far-reaching consequences for both the debtor and the creditor. An important principle in this regard is the so-called plurality principle. According to this principle, bankruptcy can only be declared if there are multiple creditors. This publication focuses on the legal framework for bankruptcy in the Netherlands. It explores the principle of plurality, the role of the so-called ‘support claim’, and the circumstances under which a debtor is considered to have ceased making payments.

The plurality principle

In the event of bankruptcy, all of the debtor’s assets are seized for the benefit of all creditors.¹ Bankruptcy is declared by a court order at the request of one or more creditors, or at the debtor’s own request.² If there are reasons of public interest, bankruptcy may also be declared at the request of the Public Prosecutor.³ Article 1(1) of the Faillissementswet (‘Fw’) stipulates that for a declaration of bankruptcy, the debtor must be in a situation where he has ceased to pay his debts. In principle, this situation can only arise if there is more than one creditor.⁴ This is also referred to as the plurality principle. In order to comply with this principle, the declaration or petition must show that at least more than one creditor has not been paid. The second claim is referred to as the ‘support claim’.⁵

Support claim

A support claim does not have to be due and payable, nor does the amount of the claim have to be fixed.⁶ Furthermore, the support claim does not have to relate to the payment of a sum of money.⁷ It is sufficient that the claim can be submitted for verification in the bankruptcy proceedings so that the creditor can share in the proceeds of the liquidation that takes place in that context, possibly after application of Article 133 of the Fw.⁸ A future claim, however, cannot serve as a support claim. It is insufficiently certain that a future claim will actually arise. ⁹Furthermore, the creditor of the support claim does not have to give its consent for the use of its claim in the bankruptcy petition. Nor does the creditor of the support claim have to insist on payment or have any interest in the debtor’s bankruptcy.¹⁰ It is also irrelevant whether the claim is disputed.¹¹

In absence of a support claim

At first glance, the plurality principle seems fairly straightforward. However, as will be illustrated, complex situations can arise. For instance, when two creditors are so intertwined, or have claims that are so intertwined, they may be considered to be one creditor. In that case, and in absence of other creditors, the requirements of the plurality principle are not met.¹² Consequently, not all requirements of Article1(1) of the Fw are satified, and the petition for bankruptcy must be denied. A common example of this involves government bodies without legal personality, such as the Tax and Customs Administration. Claims by the Tax and Customs Administration are considered as claims by the State. If the State files for bankruptcy and uses a claim by the Tax and Customs Administration as support claim, the plurality requirement is not fulfilled.¹³

State of having ceased to pay

In addition to the requirement of having more than one creditor, Article 1(1) of the Fw stipulates that the debtor must be in a state of having ceased to pay.¹⁴ Therefore, once it is established that there is more than one creditor, it must be assessed whether the debtor is in such a state.¹⁵ Article 6(3) of the Fw provides that a declaration of bankruptcy may be issued if there is prima facie evidence of facts or circumstances indicating this situation. The requirement for prima facie evidence of a claim arises from the purpose of bankruptcy: to distribute the debtor’s assets among all creditors.¹⁶

The court has discretion to determine whether a state of having ceased to pay exists.¹⁷ In making this assessment, the court may take into account several relevant circumstances, including:

1. whether the debtor is delaying payments longer than is customary among the group to which they belong, considering the nature of the debts in question¹⁸
2. whether there is clarity regarding the timing of payment;
3. general payment behaviour within the industry;
4. whether the debtor acknowledges their inability to pay;
5. the policy and payment behaviour of the debtor’s spouse with respect to debts for which both spouses are jointly and severally liable;
6. whether creditors other than the creditor-applicant are insisting on payment;¹⁹
7. whether payment arrangements have been made with creditors other than the creditor- applicant;²⁰
8. the number and extent of support claims;
9. whether the creditor-applicant and the debtor are involved in proceedings concerning the claim of the creditor.²¹

The assessment of whether a a state of having ceased to pay exists is based on the date of the decision, both at first instance and on appeal. An ‘ex nunc’ assessment is therefore carried out.²² If the debtor pays the claim of the applicant creditor and/or the claim for support before the decision is made, a plurality of creditors can no longer be established. ²³

Conclusion

Bankruptcy can only be declared if all the requirements of Article 1(1) of the Faillissmentswet (the Dutch Bankruptcy Act) are satisfied. Firstly, the plurality principle must be met. This means that, in addition to the creditor-petitioner, there must be at least one other creditor with a claim that can be submitted for verification in the bankruptcy proceedings. This supporting claim does not need to be due and payable, nor does it need to involve a monetary sum.

A second requirement is that the debtor must be in a state of having ceased to pay. According to Article 6(3) of the Faillissementswet, there must be prima facie evidence of facts or circumstances indicating this situation. The court has discretion to assess whether such a state exists. A number of relevant circumstances that may be taken into account in the assessment are discussed in this publication. The assessment is based on the circumstances at the court’s decision. The plurality principle and the state of having ceased to pay thus constitute the foundation for for a legally valid declaration of bankruptcy.

Reference list

^1. Groot 2020, par. 2.5.3.6.
^2. Artikel 1 lid 1 Fw.
^3. Artikel 1 lid 2 Fw.
^4. Groot 2020, par. 2.5.3.6.
^5. Groot 2020, par. 2.5.3.6.
^6. Supreme Court 11-07-2014, ECLI:NL:HR:2014:1681, r.o. 3.4.2. (ABN AMRO/Berzona).
^7. Supreme Court 11-07-2014, ECLI:NL:HR:2014:1681, r.o. 3.4.2. (ABN AMRO/Berzona).
^8. Supreme Court 11-07-2014, ECLI:NL:HR:2014:1681, r.o. 3.4.2. (ABN AMRO/Berzona).
^9. Supreme Court 11-07-2014, ECLI:NL:HR:2014:1681, r.o. 3.4.3. (ABN AMRO/Berzona).
^10. Supreme Court 7 May 1993, ECLI:NL:HR:1993:ZC0956, NJ 1993/403 (Swane/Van Dam-Meiss), Supreme Court 10 May 1996, ECLI:NL:HR:1996:ZC2076, NJ 1996/524 (Travel Line/CZAV) & Groot 2020, par. 2.5.3.6.
^11. Supreme Court 10 June 1988, ECLI:NL:HR:1988:AC1502 (Faillissement Leutscher III) & Groot 2020, par. 2.5.3.6.
^12. Supreme Court 24 July 1995, ECLI:NL:HR:1995:ZC1792, NJ 1995/733 (Faillissement Damen) & Groot 2020, par. 2.5.3.6.
^13. Supreme Court 26 October 2018, ECLI:NL:HR:2018:1988 & Groot 2020, par. 2.5.3.6.
^14. Supreme Court 7 september 2001, ECLI:NL:HR:2001:AB2743, NJ 2001/550.
^15. Supreme Court 11 July 2014, ECLI:NL:HR:2014:1681, NJ 2014/407.
^16. Supreme Court 22 March 1985, ECLI:NL:HR1985:AG4980, NJ 1985/548, r.o. 3.4.1.
^17. Groot 2020, par. 2.5.3.6.
^18. Supreme Court 13 October 1972, ECLI:NL:HR:1972:AB4685, NJ 1973/49 (X./Lankhaar).
^19. Supreme Court 8 December 1978, ECLI:NL:HR:1978:AC0626, NJ 1979/87 (Gemeente Rotterdam/HIM).
^20. Supreme Court 22 July 1988, ECLI:NL:HR:1988:ZC3883 (Offermanns/Lucassen).
^21. Groot 2020, par. 2.5.3.6.
^22. Supreme Court 17 January 2014, ECLI:NL:HR:2014:98 (X./Unitco).
^23. Supreme Court 17 January 2014, ECLI:NL:HR:2014:98 (X./Unitco).