2.3 Transferring Immovable Property after Bankruptcy; the Fixation Principle under Dutch Law

As stated before, immovable property is often an asset of considerable financial value. Therefore, it stands to reason that an immovable asset is also a valuable object to take recourse against for creditors who have a claim against the owner of the immovable property. When debtors go bankrupt, it is in the interest of the creditors as a whole that assets remain in the insolvent estate.

The fixation principle plays an important role in this regard. Upon bankruptcy, the insolvent estate is exclusively intended to be liquidated so that the proceeds can be distributed among creditors. The fixation principle, therefore, ‘fixes’ the insolvent estate on two levels. Firstly, it fixes the assets; upon bankruptcy, the insolvent can no longer dispose of any assets belonging to the insolvent estate (Section 23 Dutch Bankruptcy Act (hereinafter: Fw). This form of fixation prevents the transfer of immovable property that forms part of the insolvent estate. Secondly, it fixes the liabilities; after bankruptcy, the insolvent can no longer incur new liabilities (section 24 Fw). The latter form of fixation is to prevent the insolvent from concluding contracts that could be detrimental to the value of the estate.

The fixation principle serves for the protection of creditors. The debtor has already caused enough harm to the creditors, and should therefore no longer be allowed to conduct acts that have detrimental consequences for the creditor’s right of recourse.1^,2 In addition to this, the fixation principle purports to fix the relative position of each creditor. The assets should be liquidated and the proceeds thereof distributed in accordance with the relevant bankruptcy act. A key principle of bankruptcy law that should in general be taken into account is the paritas creditorium or pari passu rule.3 This rule entails that all creditors should, in principle, be treated equally. The fixation principle ensures that the pari passu rule is taken into account, by fixing the relative position of each creditor. This prevents the debtor from performing an act whereby a creditor obtains a better position in the insolvency proceedings than this creditor would otherwise have had.

It should be noted that the purpose of the fixation principle closely resembles that of the rules on transaction avoidance. Furthermore, the fixation principle and the rules concerning transaction avoidance have, to a certain extent, a common nature. These rules share the potential to have a direct influence on the transfer of immovable assets, in order to protect the interests of the body of creditors of the bankrupt seller. It could be argued, therefore, that, the fixation principle can be seen as a form of transaction avoidance with a much wider scope. In this view, the fixation principle is a form of transaction avoidance that renders the transfer void, notwithstanding the extent of the detrimental effects for the insolvent estate and notwithstanding the state of mind of the seller and the buyer.4,5 However, one major difference in nature between these sets of rules must be borne in mind. A transfer in contravention of the fixation principle is void ab initio. A transfer that can be avoided by virtue of the rules on transaction avoidance is, in principle, valid, but avoidable afterwards by the bankruptcy trustee, if certain other requirements are met.

The distinction between juridical acts (that bring about the transfer of ownership) that are ‘avoidable’ and that are ‘void ab initio’ may pose a terminological problem. With regard to transfers that are void ab initio, it can be argued that this ‘transfer’ must be held valid unless someone challenges it. On the other hand, one may argue that a void transfer does not constitute a transfer at all.6 However, for the sake of clarity, this paper refers to these instances as (void) ‘transfers’ nonetheless.

Under Dutch private law, the fixation principle with regard to the fixation of assets is embodied in section 23 Fw:

As a result of the declaration of bankruptcy the bankrupt debtor loses the right to dispose of and to administer his assets (property) as far as these belong to the liquidation estate, this with effect from and including the day on which the bankruptcy order is rendered.7

Two key elements of this section must be emphasised. The first element is that bankrupt debtors remain the owner of their assets.8 However, from the moment that the assets are fixed, bankrupt debtors lose their power to dispose of those assets themselves. Secondly, the fixation of assets does not take place following the bankruptcy order by the court. Instead, the fixation has a retroactive effect: the assets are fixed at midnight (0.00 am) on the day that the debtor is declared bankrupt. This may give rise to a situation where the seller has lost his power to dispose of his assets, while the buyer could not have been aware of this because the seller has not yet been declared bankrupt. The following example illustrates this statement. Person A sells immovable property to person B. Both of them visit a notary on May the 10th in order to effect the transfer. The notary examines the Central Insolvency Registry (CIR)9 for A’s insolvency at 10 am (and finds that A is not bankrupt at 10 am), and signs the notarial deed at 11 am. The deed is registered at 11.30 am. However, at 3 pm on the same afternoon, A is declared bankrupt by the court. The legal effect is that A lacked the power to dispose of the immovable property as from 0:00 hours that same day. Whether or not B should be protected if he or she is in good faith is still a debated question.10 Hereinafter, this paper assumes that B is not protected in this situation.

Section 24 Fw expresses the fixation of liabilities:

The liquidation estate is only liable for obligations of the debtor that have arisen after the declaration of bankruptcy to the extent that the estate benefits from such obligations.

Since the contract of sale does not require the assistance of a legal practitioner, the seller and buyer can always conclude a contract after the bankruptcy of the seller. However, any attempt to do so cannot legally bind the insolvent estate, unless the contract is beneficial for the value of the insolvent estate.11 Since this paper aims to analyse the situation where the immovable property has already been sold prior to bankruptcy (see section 1), this paper does not elaborate further on the fixation of liabilities.