Joint liability under the CERP Act

Although the Dutch Act on Confirmation of Extrajudicial Restructuring Plans (“CERP Act”, in Dutch: Wet homologatie onderhands akkoord, or WHOA) will offer many benefits, those benefits do not extend to any party that has guaranteed fulfilment of the obligations of a “CERP Act debtor”. The principle under the CERP Act is that parties that are jointly liable for the debtor’s debts remain liable towards third parties for the entire debt if the original debtor offers a composition. In practice, this means the following. Imagine that Company A has a 100 euro debt to its creditor, and agrees to pay 20 euros of that debt under the composition for which confirmation is sought. If Company B has guaranteed payment of the debt, the creditor can then hold Company B liable for the remaining 80 euros. This rule is laid down in section 370(2) of the Dutch Bankruptcy and Insolvency Act (“Insolvency Act”, in Dutch: Faillissementswet).

Group companies

It is common practice for group companies to guarantee payment of each other’s debts. This of course poses various problems, which is why the CERP Act includes a separate mechanism for corporate groups. To find out more about that mechanism, see our blog on “The CERP Act and corporate groups”.

Guarantors and creditors

For guarantors that are not part of the same group as the debtor, the arrangements work very unfavourably: a creditor can hold the guarantor liable for the original amount of the claim on the debtor – regardless of the type of guarantee, including suretyship. At the same time, the new rules state that the guarantor cannot seek redress against the creditor after the composition has been confirmed in order to recover the amount paid out to the creditor. The idea behind this is that holding debtors liable, after the composition has been confirmed, for the entire debt would erode the operation of the composition. As such, the guarantor is deprived of any and all possibilities of redress. This rule also applies if the relationship between the debtor and the guarantor is governed by non-Dutch law.

However, the legislature has built in a safety feature to ensure that no creditor may be paid more than the claim that existed before the composition was confirmed. For example, if the guarantor makes a full payment of a claim to a creditor, and that creditor is also set to receive partial payment of the claim based on the composition, the creditor’s rights under the composition will pass to the guarantor. This prevents situations where the creditor is paid too much.

In practice, this could mean that creditors will start demanding guarantees from parties outside the debtor’s corporate group. At the same time, those parties will need to be aware of the risks, i.e. that they may become obliged to pay out significant amounts without any means to recover them from the principal debtor.