Duration of debt restructuring after prior bankruptcy

Court of The Hague May 27, 2014, ECLI:NL:RBDHA:2014:7671

The law states that the term of the debt rescheduling arrangement is three years, counting from the day of the decision to apply the debt rescheduling arrangement (art. 349a Fw). However, there are many possible exceptions to this, in the form of shortening or extending the term and all kinds of variations on this. Much has already been written about the term of the debt rescheduling arrangement, including in the first edition of this year's Wsnp Periodiek. And in view of the preliminary questions on extension of the term of the debt rescheduling arrangement recently answered by the Supreme Court (ECLI:HR:2014:2935), this subject has not yet been exhausted either. More on that preliminary ruling, by the way, no doubt, in the next issue of Wsnp Periodiek. In this article I take a closer look at the judgment rendered on May 27, 2014 by the District Court of The Hague. The case concerned a request by the debtor to shorten the term of the debt rescheduling arrangement after the bankruptcy had been converted into a debt rescheduling arrangement.

The facts

On February 20, 2014, the debt rescheduling arrangement was declared in respect of debtor X, this under dissolution of his bankruptcy declared on October 18, 2011. On April 2, 2014, this debtor requested the bankruptcy judge to shorten his debt rescheduling arrangement by the duration of the period he has been in bankruptcy - which is almost 28 months. However, the supervisory judge rejected that request, which rejection is subject to appeal under Section 315(1) of the FW. The debtor timely appealed this decision to the District Court in The Hague. He requested that the term of his debt rescheduling arrangement be reduced by the number of months he had been in a state of bankruptcy. At the hearing the debtor argued that, if necessary, a shorter period could also be considered. The reason why he believes he may be eligible for reduction is the fact that during the period of the bankruptcy he remitted income in excess of vtlb to the trustee.

Shortening term not straightforward

The court considers that a period during which payments have been made to the bankruptcy estate during the bankruptcy should not automatically lead to shortening the term of the debt restructuring arrangement by an equal period. The court takes as its starting point that shortening the term is a discretionary power of the bankruptcy judge. The interests of the creditors to get as much of their debts paid as possible must be weighed against the interest of the debtor to get a clean slate as soon as possible. This balancing of interests has emerged in case law before, including in a Supreme Court judgment of September 13, 2013 (ECLI:NL:HR:2013:699, NJ 2013/447).

That case (before the Supreme Court) involved a conversion of two bankruptcies into debt restructuring arrangements under Section 15b of the FW. In addition to that conversion request, the application for conversion had also directly requested that the term of the arrangement be shortened by the period during which the applicants had paid their income above vtlb to the estate during the bankruptcy. The conversion request was subsequently granted by the court, with the court setting the term of the settlements at the regular three years from the date of the judgment. The applicants disagreed with the setting of that term and appealed. However, the Court of Appeal dismissed the appeal with the opinion that, on the one hand, the contested judgment was based on Section 15b in conjunction with Section 284 of the FW, against which no appeal is possible in view of Section 15c of the FW and, on the other hand, that there was also no violation of a fundamental principle of law - which was invoked by the appellants. For the sake of completeness, the Court of Appeal considered that the District Court correctly applied the discretionary power it had under Article 1.7 of the Recofa Directives to shorten the term of the debt rescheduling arrangement, because in this case the interests of the creditors should prevail over the interest of the applicants to get a clean slate as soon as possible. The Court of Appeals also ruled against them. Reason for the applicants to appeal in cassation.

Although the Supreme Court ruled differently from the Court of Appeal with respect to the answer to the question of whether or not there was an appeal against the decision of the district court with respect to the requested reduction of the term, the Supreme Court upheld the judgment of the Court of Appeal because the decision of the Court of Appeal was supported by the consideration of overruling - see above. Berend Engberts previously wrote a worthwhile article about this ruling in Wsnp Periodiek number 1 of this year. Although at its core it is a different issue, the weighing of interests between creditors and debtor also comes into play here and the fact that this weighing of interests was done by the court of appeal ultimately plays a crucial role for the outcome of the proceedings. Had the court omitted that consideration for the sake of completeness, the Supreme Court might not have been able to uphold the court's judgment.

Considerations of the court

Back to the ruling of the District Court of The Hague on the request for shortening the term. How does the court now reach the opinion that the period during which payments were made to the bankruptcy estate during the bankruptcy should not automatically lead to shortening the term of the debt restructuring arrangement by an equal period?

Debtor argues that since October 18, 2011 - i.e. from the beginning of the bankruptcy - he has complied with the obligations arising from the bankruptcy and debt rescheduling arrangement and that, if he had been admitted to the debt rescheduling arrangement immediately on October 18, 2011, the arrangement would in principle have ended on October 18, 2014. According to him, it is hard to see why a longer term (in the sense of "longer than until October 18, 2014") should apply to his debt rescheduling arrangement. The court considered - correctly, in my view - that the debt restructuring arrangement imposes its own obligations on the debtor. Where those obligations correspond to those in bankruptcy, the consequences of their fulfillment or non-fulfillment in the debt restructuring arrangement are different. In particular, the debt restructuring arrangement is aimed at earning the clean slate, while in bankruptcy the emphasis is on liquidating the estate. Also different are the penalties for non-compliance, which, incidentally, are not discussed by the court. Indeed, in the case of debt restructuring, failure to fulfill obligations can lead to interim termination. The debtor then does not receive a clean slate and access to the arrangement is blocked for the duration of ten years. Termination of the bankruptcy without a solution to the debts - for example, in the form of a creditors' agreement or a conversion into debt rescheduling - is also an unpleasant situation, but a clean slate was out of the question from the bankruptcy, and the debtor is not denied access to the debt rescheduling arrangement either.

Furthermore, the court takes into account that a regular request for admission must be preceded by an amicable trajectory. Such a trajectory also usually takes quite some time and also during that period, if there is remittance capacity, creditors are saved for. The Recofa Guidelines, Article 1.7 under c, explicitly state that, in principle, the term of the debt rescheduling arrangement will not be shortened if, prior to admission, a longer period of time has been saved up in an amicable course or during a moratorium. The Court sees no reason, or at least no (sufficient) special circumstances have been put forward to this end, to act differently now that bankruptcy preceded the declaration of applicability of the debt restructuring scheme.

Balance of interests

So no automatic shortening, the court ruled. The interests of the creditors to get as much as possible of their debts paid must be weighed against the interest of the debtor to get a clean slate as soon as possible. The court refers to article 1.7 of the Recofa directives, which I assume is what is stipulated under b:

"The statutory period may be shortened, among other things, if the debtor in a bankruptcy or prior moratorium prior to the debt restructuring arrangement has remitted to the estate the excess above the release amount applicable in the debt restructuring arrangement."

According to the court, the circumstance that payments in excess of the vtlb were made during the bankruptcy can also play a role in the decision on shortening the term, but is not of a decisive nature. After all, the fulfillment of the obligations related to the bankruptcy situation is no more than the fulfillment of obligations arising from the law and therefore does not in itself qualify as a special circumstance on the part of the debtor.

As far as the interests of creditors are concerned, a factor is that in principle they are entitled to payment of 100% of their claims. For this reason, they can demand that the debtor make the greatest possible contribution and effort during the debt restructuring arrangement. In the present case, there is considerable indebtedness. The debtor also has, the administrator has calculated, a reasonable remittance option. The remittances during the bankruptcy, because of the bankruptcy costs, have not resulted in estate assets from which a significant distribution to creditors is possible. If the three-year period for debt restructuring is maintained - given the debtor's remittance capacity - a significant portion of the debt burden will be able to be satisfied, the court said. A three-year debt restructuring period is expected to lead to an increase in the estate assets eligible for distribution of approximately €7,500, which amount, according to the court, rightly cannot be qualified as a "negligible additional yield."

The debtor's interest in shortening the debt restructuring period is, first of all, the fact that the obligations arising from application of the debt restructuring arrangement are shorter and, secondly, that the debtor acquires the clean slate more quickly.

Considering the above, the court concludes that the creditors' interests in maintaining the three-year term outweigh the debtor's interest in shortening that term. Furthermore, the debtor has not submitted any facts or circumstances that would lead the court to a different opinion, so that the court rejects the request for reduction and upholds the contested decision of the bankruptcy judge.

The main rule - as is evident from this ruling and also follows from article 349a paragraph 1 Fw - is that a debt restructuring arrangement simply lasts three years, during which period the debtor is given the opportunity to earn the clean slate by complying with the obligations arising from the application of the debt restructuring arrangement. The law makes several exceptions to this main rule. Consider, among others, article 349a paragraph 2 and 354a Fw. The Recofa guidelines also offer the possibility of changing the regular term, namely in the aforementioned Article 1.7. If the debt restructuring was preceded by an amicable settlement, the term cannot in principle be shortened, but if there was a prior bankruptcy in which the surplus above the amount to be released was paid to the estate, this may be possible.

The present case involved a prior bankruptcy. Because of the bankruptcy costs, the remittances made by the debtor during the bankruptcy period did not result in any estate assets from which a significant distribution could be made to creditors. In other words - at least, so is my interpretation - the remittances went up to the trustee's salary and expenses. That the debtor has remitted is, the court ruled, not decisive because the remittance in itself is not to be regarded as a special circumstance but counts as the fulfillment of an obligation arising from the law. This debtor now seeks shortening of the term because, he argues, had he been admitted to the debt rescheduling arrangement on October 18, 2011, that arrangement would, in principle, have ended on October 18, 2014. He does not see why it should now all take another three years from the date of application of the debt restructuring scheme. He also argues that he was not notified of the 14-day period referred to in Article 3 Fw when the bankruptcy petition was being processed. In the article by Theo Pouw elsewhere in this edition, in which he writes about the options available to the business owner who does not want to go bankrupt and who also does not want to apply for admission to the Wsnp immediately, this subject is discussed in more detail. The court believes that in this case, the debtor has not provided sufficient facts and circumstances on the basis of which the court could conclude that, if the debtor had been notified of this 14-day period, this would have already led to application of the debt restructuring scheme in or around October 2011.

It will undoubtedly happen more often - at least that is my experience - that the amount saved by the debtor during the bankruptcy process is, to a greater or lesser extent, spent on bankruptcy costs. This is in contrast to cases in which the amicable process has not been successful after which a request for application of the debt rescheduling arrangement has been made. Any balance saved during the amicable process flows fully into the debt restructuring estate. In view of the interests of the creditors, I believe that these interests are better served by an amicable procedure than by a prior bankruptcy. It is not clear to me why a reduction of the term can be at issue in the case of a prior bankruptcy and not in the case of a prior amicable settlement.

In addition, the remittance obligation is not the only obligation during debt restructuring. During bankruptcy, for example, there is no obligation to work or apply for a job. What if a debtor asks for his debt restructuring to be shortened, after he could not be obliged to make any payments in the bankruptcy on the basis of the vtlb calculation, but when he has demonstrably made maximum efforts to find a paid job in the regular labor market? Is this debtor then still eligible for reduction of the term? Incidentally, I can imagine that a debtor, when applying to the bankruptcy judge for a reduction of the term, must demonstrate that he or she has made every effort to maximize the proceeds for the creditors. And that then, therefore, the fulfillment of the debt restructuring obligations during the bankruptcy includes not only the remittance obligation, but also any application obligation.

The interests of the debtor and those of the creditors clash once again here, according to Geert Lankhorst.[1] Those interests of the creditors are clear. And that the debtor wants a clean slate is also clear. The term "balancing of interests" suggests that there are situations in which the debtor's interest in abridgment outweighs that interest. In what situation(s) would that be so? In my opinion, the interests of creditors to get as large a portion of their claims paid as possible should always prevail over the debtor's interest in getting a clean slate as quickly as possible, and a balancing of those interests is therefore unnecessary. No justice is done to the situation of creditors facing debt restructuring if the already limited term of three years is also shortened. Creditors (excluding separatists) have to wait for the course of the arrangement and then rarely if ever see their claims paid 100%. To do as much justice to their interests as possible, in my view the regular term should remain intact so that maximum savings can be made. Only at the moment when a relevant additional yield is not at issue, because there is no question of any saving capacity and the arrangement therefore costs more than it yields for the creditors, could shortening of the term be an issue on the grounds of Section 354a, subsection 1, Fw. However, this is independent of whether the debt restructuring arrangement was preceded by bankruptcy or not.

[1] http://www.modusvivendi.nl/index.php?option=com_k2&view=item&id=167:verkorting-looptijd-schuldsanering