Innovating in times of crisis: insolvency-proof contracts under Dutch law
Published on 9th Apr 2020
With a recession appearing to be inevitable, for many companies innovation is more important than ever. Innovating and contracting in times of crisis requires caution, however, and contracts should as far as possible be insolvency-proof. Popular solutions include guarantees, sureties and retention of title. But it may be worth considering a lesser known option, the intercompany settlement clause, which works as follows.
Paying a debt to an insolvent company
Your company owes an undisputed debt to an insolvent company, while your subsidiary has a substantial claim against the same insolvent company. Are you under a legal obligation to pay the debt to the insolvent company, or can the debt be set off against your subsidiary's claim?
Reciprocity of debts
As a general rule under Dutch law, you will have to pay the undisputed debt to the insolvent company, despite the fact that your subsidiary's claim on the insolvent company will likely remain unpaid. Dutch law (article 6:127 of the Dutch Civil Code and article 53 of the Insolvency Act) only provides a legal basis to set off claims provided that parties are each other's debtors. This is called the reciprocity of debts requirement.
Intercompany settlement clause
The good news is that parties are allowed to derogate from the reciprocity of debts requirement by contract. For example, parties may contractually agree that claims against other (group) companies may also be set off. This is referred to as "intercompany settlement" or "cross settlement".
Until recently, various judges and authors assumed that an intercompany settlement clause had no effect in the case of bankruptcy. The Supreme Court of the Netherlands ruled otherwise on 15 November 2019: such an agreed extension of the power to set off does have an effect during bankruptcy (freely translated as follows):
"The parties may validly extend the power provided for in article 6:127 of the Dutch Civil Code to set off claims outside bankruptcy by agreeing that claims may be set off even if they are not reciprocally creditor and debtor. There is no ground for depriving such an agreement of its effect if one of those parties is subsequently declared insolvent".
In the above example, therefore, the answer is that you don't have to pay the insolvent company, provided clear arrangements were made beforehand. It is important that such arrangements are made at an early stage, preferably at the start of the contractual relationship. An intercompany settlement clause that is included during the course of the contract in sight of bankruptcy runs the risk of being marked as fraudulent ("paulianeus") and being set aside by an insolvency practitioner.
This does not mean that there is always an obligation to pay an insolvent party if parties did not agree upon an intercompany settlement clause. Other defences may be viable. For example: if contractual warranties can no longer be honoured by an insolvent company, payment in full may not be appropriate. When dealing with an insolvent creditor, it is also important to make sure that any payments are made to the right party: this could either be the insolvency practitioner or a pledgee, which varies on a case-by-case basis. Payments made to the wrong party might even result in having to pay twice. It is recommended to always get expert advice when dealing with a (near) insolvent party.
If you wish to insolvency-proof your contracts, if you are worried that your contracting party may become insolvent, or perhaps already is, then it is recommended to seek expert advice.
We are happy to help you innovate by limiting your legal risks.