Dutch Supreme Court answers questions on setoff before and during bankruptcy and suspension of payments

The case underlying the judgment is the 2016 bankruptcy of Flinter, a Dutch shipping company. The bankruptcy followed a suspension of payments granted to a number of companies in the Flinter group. During the resolution of the bankruptcy, the bankruptcy trustee and Flinter's principal bank disagreed on, among other things, the legality of certain setoffs made by the bank shortly after the suspension of payments was granted. Following the first instance decision, the bankruptcy trustee and the bank decided to leapfrog directly to the Supreme Court on three questions of law.

Article 53 of the Dutch Bankruptcy Act (DBA) for bankruptcy (and Article 234 DBA for suspension of payments) provides that a right of setoff exists if a debt and a claim arise before the declaration of bankruptcy or if they result from actions carried out with the debtor before the declaration of bankruptcy. This very broad right of setoff is limited by Article 54 DBA (and Article 235 DBA for suspension of payments), which provides that if debts or claims are transferred before the declaration of bankruptcy, setoff is possible only if this was done in good faith. Debts and claims transferred after the declaration of bankruptcy cannot be set off. Already several decades ago, the Dutch Supreme Court ruled that for purposes of Article 54 DBA, a transfer into a bank account is deemed a transfer of a debt, meaning that a bank cannot setoff incoming payments against a debit balance if the bank is not in good faith (in the landmark Giro/Standaard Films case). However, for banks that hold undisclosed rights of pledge on claims of the account holder (stille pandrechten), far-reaching 'exceptions to the exceptions' were adopted by the Supreme Court in the Mulder/CLBN judgment (ECLI:NL:HR:1995:ZC1641). It follows from this judgment that banks may set off payments of these claims even if the bank is not in good faith within the meaning of Article 54 DBA (Article 235 DBA for suspension of payments) or if the payments were received during bankruptcy.

The first question before the Supreme Court concerns the standard of 'good faith'. It was decided in earlier case law (ECLI:NL:HR:2012:BU6552) that 'good faith' within the meaning of Article 54 DBA means 'knowing that the subsequently bankrupt debtor was in such a situation that bankruptcy or suspension of payments was to be expected'. The question in the current case before the Dutch Supreme Court was how to assess this 'knowing': should this be determined according to a subjective or an objective criterion? The Supreme Court ruled that 'good faith' must be determined objectively. This means that a party claiming setoff acts in good faith only if it should not reasonably have known that bankruptcy or suspension of payments was to be expected. Furthermore, the bank argued for a specific 'banking criterion', according to which the bank’s willingness to finance, continue to finance or cooperate in a rescue attempt would suffice to constitute good faith. However, the Supreme Court did not accept this, ruling that this alone was insufficient and that all the circumstances of the case should be assessed.

As the third question before the court involves the same legal framework as the first question, we will first discuss that question. The third question concerns the scope of the 'exception to the exception' from the aforementioned Mulder/CLBN judgment: does the Mulder/CLBN-rule only apply if the third party's payment was made to an account in the name of the pledgor? The Supreme Court answers the question in the negative: the exception does not only apply in case of payment in the bank account of the pledgor. However, for a valid setoff in case the payment is made in the account of another party, it is required that the right of pledge also served as security for the debt of that other party. The factual background of this question involved two companies within the Flinter Group: Chartering and Shipping. Chartering had a claim on Vestas. Vestas paid this claim in a bank account in the name of Shipping after suspension of payments had been granted to Shipping. This payment resulted in a higher credit balance in the account in the name of Shipping. Both Chartering and Shipping had granted a right of pledge over all their receivables to the account holding bank, as did other companies within the Flinter Group who held accounts with the same bank. The bank set off the entire credit balance of Shipping against the debit balances in the accounts in the name of other Flinter Group companies. The bankruptcy trustee argued that the bank was not allowed to set off Shipping's credit balance to the extent that it resulted from the payment by Vestas, because the bank was not in good faith and could not rely on the Mulder/CLBN-rule. The Supreme Court dismisses the bankruptcy trustee's argumentation. According to the Supreme Court ruling, the Mulder/CLBN-rule does apply to the banks's right of setoff, provided that the right of pledge provided by Chartering also served as security for Shipping's debts. The Supreme Court also held, contrary to the District Court, that the fact that a bank holds a right of pledge over its account holders' claims on the bank (which it usually does) does not justify application of the Mulder/CLBN-rule.

Finally, the 'second' question. Shortly after the suspension of payments had been granted, the bank transferred credit balances from the accounts of the companies under suspension of payments to accounts in the Flinter group with debit balances. Although the bank had a contractual right of setoff, it initially relied on the joint and several liability that the Flinter group companies had assumed towards the bank and a power of attorney from Flinter's board of directors to transfer amounts between bank accounts. However, the bankruptcy trustee argued that the power of attorney could not be relied upon because of Article 228 DBA, which provides that, from the suspension of payments onwards, the debtor is authorized only together with the bankruptcy trustee, and therefore the bankruptcy trustee should have been asked for permission. However, the Supreme Court upheld the setoff on the ground that the bank was entitled to set off on the basis of a contractual setoff clause, in spite of the bank's initial sole reliance on the power of attorney.

Before this case, banks already had extensive rights of setoff before and during bankruptcy and a suspension of payments. These rights were extended further in this case: when a debtor receives payments of its receivables or receivables of group companies in its bank account, and the bank holds undisclosed rights of pledge over these receivables, the bank may proceed with setoff in many cases. However, this case demonstrates that when, for example, the validity of the rights of pledge is in dispute, the standard of good faith may still play a role. Since this judgment, it is clear that the criterion to establish good faith in this respect is of an objective nature: it is irrelevant what the bank knew – what is relevant is what it should have known.