Reversing dubious transactions

It’s quite common for all kinds of transactions to be carried out just before insolvency is declared, with the intention of “securing” the assets or interests of specific suppliers or creditors. In fact, this amounts to giving preference to specific parties at the expense of others. Dubious dealings of this kind (known as disadvantageous transactions) are not permitted.

The basic principle of the Dutch Insolvency Act is that, if it is not possible to comply with all obligations to creditors and a situation has arisen where payments have ceased, all creditors must be treated equally, subject to the statutory rules of priority. Article 42 of the Insolvency Act therefore provides that the trustee in insolvency is entitled for the benefit of the total assets (the insolvency that he is managing) to cancel any legally binding transaction that the subsequently insolvent party carried out at a time when that party was, or should have been, aware that the transaction would disadvantage creditors. This makes the relevant legal transaction invalid. It should be noted that there are some exceptions to this rule.

If the other party to the transaction with the subsequently insolvent party was required to give consideration, then the legal transaction can only be cancelled if that other party knew, or should have known, that creditors would be disadvantaged as a result. In simple terms, if you don’t know that you’re playing a dirty trick on someone else by getting ahead, then you’re acting in good faith and the trustee can’t “catch” you. In that case, you are protected as an outsider.

The legislation describes a number of factors deemed to constitute evidence that help the trustee to take action against abuse and unfair dealings. For example, it is less difficult to cancel a disadvantageous legal transaction if it took place less than a year before the declaration of insolvency and between the insolvent individual or company and either an immediate family member or spouse or a legal person in which an immediate family member or spouse is a director, supervisory board member or shareholder. In that case, the legislation provides for an assumption that both parties were aware of the disadvantage. It is then up to the family member or spouse concerned to prove that this is not the case. In practice, this is likely to be very difficult.

Article 52 of the Insolvency Act also provides for an assumption that both parties were aware of the disadvantage if the other party did not have to give any consideration. As already explained, if both parties were aware of this then the legal transaction is voidable.