Set-off following insolvency

When a trustee in insolvency (known in Dutch as a ‘curator’) is notified of a debt, he adds the details to the list of provisionally acknowledged creditors. As is common knowledge, the likelihood that you will then receive payment from the trustee is not particularly high. After all, the reason that the individual or company has been declared insolvent is because there is not enough money to go around.

The insolvent party’s debtors, on the other hand, are required by the trustee to satisfy (i.e. pay) their debts to the insolvent individual or company. The trustee is empowered to compel them to do so, if necessary by issuing court proceedings.

The fact that payments can be made to an insolvent entity but getting paid by that entity is unlikely makes set-off an interesting possibility. Cunning schemes developed to achieve payment by this method are not uncommon. The legislation therefore imposes some restrictions on such schemes.

Anyone who is owed money by a company that subsequently goes into insolvency but also has a debt to that company is entitled to set the two amounts off against one another, provided that both the amount due to him and the debt he owes date from before the insolvency and that set-off would also have been permitted had the insolvency not occurred.

If shortly before a company is declared insolvent someone takes over a debt owed to another by that company, in order to set this off against a debt that he owes to the insolvent company, then in theory this gives him the opportunity to earn a lot of money. After all, a debt owed by such a company can generally be purchased for a bargain price, as the other creditor will also be aware that the likelihood of payment being made at this stage is small. It is not the intention that parties should be able to profit from transactions of this kind. Consequently, Article 54 of the Dutch Insolvency Act provides that no debt owed to an insolvent company may be set off against a debt claim against the company taken over from another party prior to the company being declared insolvent if the party taking over the debt claim did not act in good faith.

A party is deemed not to have acted in good faith if he knew or should have known that insolvency would follow or at least was significantly influenced by this possibility. Obviously, it is not possible to set off debt claims taken over from other parties after a company has been declared insolvent either, as this would deprive the Insolvency Act of any effect.

A key exception is that debt claims against the insolvent entity arising after its insolvency can be set off against debts to the same insolvent entity dating from before the insolvency. For example, a landlord can set a deposit that he is required to repay to his insolvent tenant off against the rent due in respect of the notice period that the trustee has had to observe following insolvency pursuant to Article 39 of the Insolvency Act. This makes a difference as, although the trustee is obliged to pay the debt as a priority debt, he will only do so if the remaining assets in the insolvency actually cover the rent for the notice period. Very often this is not the case, so being able to set off against the deposit amount can be of significant benefit to the landlord.