11.2 Final remarks

700. The nature of subordination as a contractually based security right leaves the parties considerable freedom in shaping the subordination, but it also means that is difficult to determine the consequences of subordination in abstract. The consequences of a subordination agreement largely depend on the contents and interpretation of that specific agreement. This creates uncertainty. It also means that the consequences of a subordination agreement may depend on the intention of the parties to that agreement regarding topics that are not explicitly referred to in the agreement.

Because the Dutch Civil Code barely contains any provisions on subordination agreements, the parties to such agreements employ legal concepts not specifically intended or equipped for that purpose to construct de facto subordinations. De facto subordinations are, for example, achieved by amending the maturity date of the junior claim, or by attaching a contingency to that claim. This research shows that the statutory provisions regarding unmatured or contingent claims do not always match the goals that parties pursue with subordination agreements. This is especially visible in the treatment of contingent claims during bankruptcy proceedings. If a claim that is made contingent as a de facto subordination is treated according to the Dutch statutory provisions for treatment of contingent claims during bankruptcy, the subordinated creditor can exercise more powers during the bankruptcy than befits his position. The creditor of the contingent claim may, regardless of the actual value of that claim, vote for the nominal value of his claim on a composition plan and claim set-off for the nominal value of his claim. It is submitted that this is not appropriate if the contingency is intended as a subordination.

These types of problems call into question whether the statutory provisions regarding unmatured and contingent claims should also be applied in instances where the maturity date or contingency serves as a de facto subordination. The alternative is to not treat such a claim as a contingent or unmatured claim, but as a genuinely subordinated claim. This is only possible if the parties to the subordination agreement have intended their subordination in this manner. This, again, is a question of interpretation of the specific subordination agreement.

701. Genuine subordination is the only legal concept provided for in the Dutch Civil Code that aims to make the settlement of one claim secondary to the settlement of other claims that can be enforced against the same estate, without any (other) security rights being vested in favour of the latter claims. However, genuine subordination is very limited in scope. This research shows it only affects the ranking of the junior claim and therefore only affects the division of proceeds of liquidation. If the parties to a subordination agreement intend to further determine their relationship, they have to shape their relationship and powers with more detail in the subordination agreement. A junior agreeing to a subordination agreement does not limit his powers according to a standard set provided by law, as happens with other security rights that are governed by statute. Instead, a subordination limits the junior only in the ways agreed to in the subordination agreement. This is how combinations of genuine and de facto subordinations come into being.

702. This research shows that the lack of statutory provisions regarding the effects of genuine subordinations under Dutch law barely creates fundamental problems. Based on the characterization of genuine subordination developed in chapter five, one can determine the effect of genuine subordination on the position of the junior creditor in nearly all instances in or outside of bankruptcy. Therefore, there is little need to change the statutory law to lay down the consequences of genuine subordination.

This only differs in the case of a composition plan in bankruptcy. The current Dutch statutory provisions regarding such plans do not offer a satisfactory manner of incorporating genuinely subordinated creditors in the decision-making process, given the special interests that subordinated creditors may have. This could be solved by implementing a class system similar to the Scheme of Arrangement, and as proposed in the currently pending Dutch law on the confirmation of out-of-court agreements outside of bankruptcy proceedings.

703. This research has brought to light several topics that deserve further research. In this research, the common distinction between capital provided through debt and equity respectively, has been taken as a starting point. That distinction is clear under current Dutch law because providers of equity cannot be admitted as creditors in bankruptcy proceedings, whereas providers of capital through debt do have an admissible claim. However, subordinations blur the distinction between equity and debt. Therefore, it would be worthwhile to further investigate whether it is desirable to, under Dutch law, combine bankruptcy proceedings and subsequent winding-up proceedings of the company, as is done under German law. In that way, the full estate of the company would be wound up in a single proceeding. This matches the blurring of the distinction between equity and debt. Other modern procedures involve both equity-providers and debt-providers, such as Schemes of Arrangement and the proposed Dutch bill on the confirmation of out-of- court agreements. Claims that are not admissible in a Dutch bankruptcy under current law could in a combined procedure of bankruptcy and winding-up be admitted as claims that are subordinated by statute. This could also be cause to further investigate whether it is desirable to subordinate other claims by operation of law.