CERP Act: Protection against claims for fraudulent conveyance

The risks of claims for fraudulent conveyance

Many companies that find themselves in financial difficulty encounter another problem: banks, vendors and other lenders refuse to provide them with credit, out of fear that the company will go bankrupt within the following months and the bankruptcy trustee will void any security that it has provided on grounds of “fraudulent conveyance”. Without new funding, however, a struggling company’s chances of survival are reduced almost to zero. With this in mind, the Dutch Act on Confirmation of Extrajudicial Restructuring Plans (“CERP Act”, in Dutch: Wet homologatie onderhands akkoord, or WHOA) includes a specific provision, in section 42a of the Dutch Bankruptcy and Insolvency Act (“Insolvency Act”, in Dutch: Faillissementswet), that bars claims for fraudulent conveyance with respect to legallegal acts (in Dutch: ‘rechtshandeling’) performed once the debtor becomes involved in proceedings under the CERP Act. For this protection to apply, the act must first have been authorised by the court.  

Conditions for authorisation

To obtain that authorisation, the debtor must petition the court that is handling the composition proceedings, or (where applicable) the court that appointed the restructuring expert. It is important to bear in mind, however, that only the debtor may make a request under section 42a Insolvency Act, even if a restructuring expert (in Dutch: ‘herstructureringsdeskundige’) has been appointed to handle the debtor’s case.

Before the court gives its authorisation, it must review the act to establish whether it satisfies two requirements under section 42a. The first requirement is that the act must be necessary in order for the debtor’s operations to continue for as long as the composition is being prepared. The second requirement states that the act may only be authorised if it is reasonable to assume that it serves the interests of all the debtor’s creditors. A key factor here is that the act may not materially harm the interests of any individual creditors.

Scope of the authorisation

The Explanatory Memorandum lists what types of legal acts fall within the scope of section 42a Insolvency Act: “all legal acts that need to be performed in connection with that funding”[1], where “funding” is understood to cover all possible forms of funding, such as loans and supplies of goods on credit. Within this definition, a wide range of acts qualify, from supplying goods to forming contracts. In short, the possible protection under section 42a is very broad.

As the Explanatory Memorandum also notes, it is virtually impossible to foresee every future implication that a legal act will have for the company. As a consequence, the court will only consider the situation at the moment when the authorisation is requested, and whether no indication exists at that moment that authorising the act will harm the collective creditors.

The Explanatory Memorandum stresses that a debtor that obtains authorisation to carry out a legal act must perform that act swiftly: as the company is in a very volatile situation, in particular with regard to its finances, the court’s review of the act could potentially have a different outcome shortly after the authorisation is granted. To avoid any risks, it is prudent to keep the time between the authorisation and the act to an absolute minimum. Although the statute itself does not specify this obligation, it is very well possible that the court will authorise the legal act only on certain conditions, in order to prevent abuse, for example by requiring that the debtor’s liquidity position does not undergo any material change. If and when the conditions attached by the court are no longer satisfied, the debtor might need to apply for a new authorisation. At the same time, the statute does not specify any deadline for when a request for authorisation loses its validity; presumably, this must be a reasonable amount of time. What the Explanatory Memorandum does clarify, however, is situations where an act is authorised before a cooling-off period is imposed: in those cases, the debtor’s authorisation to effect the act remains intact during the cooling-off period.[2]

In addition – and this is the problem with this mechanism – section 42a Insolvency Act does not contain any requirements limiting the purposes for which the funding must be used once it has been obtained.  It is conceivable that the company will use the obtained funding for other purposes besides continuing its operations while the composition is being prepared. Given the protection afforded by section 42a, it will then be impossible to annul the legal act. However, courts will presumably also attach conditions to prevent abuse.

Protection against claims for fraudulent conveyance under the CERP Act: conclusion

Overall, the mechanism laid down in section 42a Insolvency Act is good news for both debtors and creditors, and will make the CERP Act more practicable.

As a consequence of the court’s authorisation, legal acts cannot be annulled under section 42 Insolvency Act in insolvency proceedings. This will make most lenders more amenable to funding companies that fall under the scope of the CERP Act, while also giving those companies the means to bridge the time between preparing the composition and obtaining the court’s confirmation.

[1] Parliamentary Records II 2018/19, 35 249, no. 3, p. 27.

[2] M. Schreurs, ‘De WHOA: (meer dan) een stok om mee te slaan’, Tijdschrift voor Insolventierecht 2020/11.