High-end debt collection: collect or write off?

A recent ruling (dated May 23, 2019) by the Den Bosch Court of Appeals shows once again that as a #creditor in a #bankruptcy, you are well advised to stand up for your own rights in a timely manner to try to collect (part of) the uncollectible #claim after all.

This can be done by giving direction to the #curator, or by going for your own success and trying to sue outside the estate to the director of the bankrupt debtor-legal entity. In this blog, I provide tips on how to give direction to the trustee. See also my earlier blog on that subject. I also discuss bringing a claim against the director on your own. We call that #highendcollection: #collect instead of write-off.

The duties of a trustee

A trustee is supposed to achieve the just and optimal result in the bankruptcy of a legal entity in the interest of the joint creditors. A trustee does this in two ways, namely (1) estate liquidation and (2) estate reconstruction.

Estate settlement

First, the trustee will liquidate the assets of the bankrupt legal entity. The trustee makes an inventory of the legal entity's properties; usually immovable property (business premises), movable property (inventory, rolling stock and inventory), intellectual property rights, database rights, receivables, work in progress, monetary values or other assets. These are monetized, whether as part of a relaunch or otherwise. Work in progress is completed or resold and (trade) receivables of the bankrupt legal entity from third parties (the customers) are collected.

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Estate reconstruction

In addition, the trustee's legal duty is to (restore) the estate to its proper condition and size. For example, the trustee investigates whether there has been a fraudulent act in respect of creditors. This concerns - in short - legal acts that have disadvantaged (the legal entity and with it) the creditors. Such legal acts can be undone by the trustee in order to get compensation for the damages thereof. The trustee also investigates whether there has been any (other) unlawful conduct by the directors or other parties involved or apparent improper management by the directors or de facto policymakers.

If this type of legitimacy issue arises, the trustee may hold the relevant party liable, with the aim of compensating the company, or its creditors, for the loss suffered (or suffered).

This then creates a bankruptcy estate - not only as the trustee found it as of the date of bankruptcy - but a bankruptcy estate as it should have been, had the imputed conduct (fraudulent misconduct, wrongful act or manifestly improper administration) not taken place. The estate is reconstructed and brought into the state and size that does justice to the position of the creditors. The aim, of course, is to be able to compensate the creditors as fairly and optimally as possible for their unpaid claims against the bankrupt legal entity.

Is the trustee doing all that right?

It occurs with some frequency that creditors believe that the trustee is not performing his duties properly. See my earlier blog. This can come into play both when it comes to estate liquidation and estate reconstruction. There are times when creditors feel there has been apparent mismanagement (often phrased as "mismanagement" or "#fraud") and that the trustee should take the director ("that crook") to task ("deal with"). And if the trustee tackles the director and then reaches a settlement, the creditors often find that settlement to be far too low an amount.

The ruling of the Den Bosch Court of Appeal

In the case on which the Den Bosch Court of Appeal had to adjudicate, there was manifestly improper management under the law because the financial statements of the bankrupt company had not been filed on time. The law contains a presumption of proof that that manifestly improper management is considered a major cause of the bankruptcy. Thus, #director liability is basically given. Moreover, the bankrupt company in question had lent many millions of euros to American sister companies, without proper agreements on repayment and security. The director who had been held liable for this gave the trustee other causes of the bankruptcy, which did not lie in his manifestly improper management. As a result, the trustee allowed the director's liability claim to stand. Also because the director lived in Brazil and it would not be easy to seek recourse against him.

The trustee then ordered the bankruptcy to be dissolved for lack of assets. As a result, creditors would not receive payment. Some creditors disagreed with this dissolution for lack of assets and appealed, arguing that the trustee should still sue the director.

However, the Court ruled that the bankruptcy was properly discharged for lack of assets, because it is the trustee - and not the individual creditors - who decides whether or not to initiate or continue board liability proceedings.

Also, the Court ruled, a trustee cannot be expected to investigate in the context of directors' liability if it is not certain that recovery from potentially liable persons is possible. The Court also finds - correctly, in my view - that in the review framework of an appeal against an order of dissolution of bankruptcy, the Court can no longer force the trustee to investigate further or invoke a guarantee scheme.

The creditors should have stood up for their own interests more - and sooner (!) - by, for example, having a creditors' committee set up during the bankruptcy or requesting the supervisory judge to order the trustee to conduct further investigation into the manifestly improper administration and the causes of the bankruptcy or into possibilities of recourse against the director to be held liable, whether or not on the basis of the guarantee scheme of the Justice Department of the Ministry of Justice.

What can creditors do to assist the trustee?

Some #tips to make sure the trustee does what creditors want:

1. The creditors could have requested the establishment of a provisional creditors' committee during the bankruptcy. Through such a creditors' committee, they could have given more direction to the bankruptcy.
2. Creditors may request the trustee to invoke the Trustee's Guarantee Scheme under which the trustee may obtain further recourse and legality investigations funded by the Ministry of Justice.
3. Creditors may request the trustee to contact the tax authorities and the FIOD to ask whether relevant information is available there.
4. If the trustee does not cooperate, creditors can ask the bankruptcy judge to order the trustee to do implement these above points.
5. The creditors themselves can make a loan to the estate to conduct recourse or liability investigations.
6. Creditors may request that the trustee be dismissed and another trustee appointed.

If you want to assist a trustee, engage a good lawyer in time, preferably one who is himself appointed as a trustee.

Or take the second route: litigate for your own success

Another option for creditors was and is to hold the directors liable on their own claim. Outside the estate and without the need for the trustee. After all, a creditor does not have to depend on the trustee for a directors' liability claim. A creditor can also directly sue a director of a company himself, if the company fails to pay the debt to the creditor.

More specifically, this can be the case when the director of the company entered into the obligation with the creditor on behalf of the company, when he knew or should have known that the company he was managing would not be able to fulfill that obligation nor provide recourse for the resulting damages.

An individual creditor can also sue a director of the company, if the director of the company has brought about that the company cannot (or can no longer) fulfill the obligations already entered into. This form of #recoursefrustration has many manifestations.

If, as a creditor, you feel that taking recourse against one of your debtors is being frustrated by that debtor's director, it would be wise to spend an hour or so discussing this with a good insolvency lawyer to assess whether, in your case, it would be expedient to address the director behind the non-paying debtor/legal entity in private.

We do this regularly and successfully and we call it #highendcollection.