10 Summary

This book carries the title "the composition scheme". It examines the legislative provisions applicable to composition schemes embodied in the Bankruptcy Code. Under current law, the Bankruptcy Code encapsulates three proceedings: bankruptcy, suspension of payments and debt adjustment for natural persons. Composition schemes are governed by separate regimes for each of these proceedings. The oldest regime applies to bankruptcy proceedings, on which the other two regimes are largely based. Hence, the starting point of this research concerns the composition scheme in bankruptcy proceedings.

The composition scheme can be described as a statutory restructuring instrument which can be used as a tool for reorganizations of businesses in financial distress and for solving financial problems of natural persons. Corporate debtors can use composition schemes to be (partially) relieved of their debts (i.e. they are no longer liable for the relevant unpaid debts). If the debtor is a legal person, the restructuring by means of a composition scheme takes place within the same legal entity. This means that after the termination of bankruptcy proceedings by the adoption of a composition scheme, the restructured legal person will continue to exist. One of the advantages of the continued existence of the restructured entity is that certain available tax losses which can be subjected to set-off can be used to ensure that initial profits of the reorganized debtor will remain untaxed.

In principle, a natural person in financial distress can only apply for the opening of debt adjustment proceedings. In case these proceedings are terminated upon the adoption of a composition scheme, a fresh start is obtained by the debtor comparable to the situation described in art. 358 of the Bankruptcy Code. This means that an insolvent natural person is no longer liable for unpaid debt if debt adjustment proceedings are terminated by the adoption of a composition scheme.

Despite these advantages, composition schemes are rarely used in legal practice. It should be stated, however, that the majority of annually opened bankruptcy proceedings are annulled due to insufficiency of assets. Consequently, in a large number of bankruptcies restructuring routes - and thus also the composition scheme - have become redundant. The number of debt adjustment proceedings which have been opened in recent years has significantly increased. However, the introduction of the debt adjustment proceedings for natural persons in December 1998 has not resulted in a material increase of the number of court approved composition schemes. Art. 287a of the Bankruptcy Code (which entered into force on 1 January 2008) has caused a substantial decline in the total number of debt adjustment proceedings.1It remains uncertain whether the number of out-of-court settlements will increase by the implementation of art. 287a of the Bankruptcy Code (which seems likely to occur).

The fact that composition schemes are rarely employed in practice explains in part why the applicable rules have drawn little attention in legal literature. To remedy this omission, the current legal regime will be extensively analysed in this book. The purpose of my research is to systematically map and analyse current law. The analysis is conducted from the perspective of the current legislative regime and its underlying principles (which also comprises the regime applicable to composition schemes). In addition to an examination of the statutory regime pertaining to composition schemes, this book contains proposals for reform, supplementation or interpretation of the applicable regime.

Chapter 2 inventories restructuring instruments available under Dutch insolvency law. This chapter discusses the going concern sale/asset stripping, the composition scheme and the out-of-court settlement. In order to be able to properly understand the position of composition schemes in Dutch insolvency law, a brief description is needed of other restructuring instruments available under Dutch insolvency law. Various general principles which bear a close relationship with composition schemes are addressed, such as the purpose of bankruptcy, the paritas creditorum (i.e. pari passu principle), the legal character of composition schemes and the binding effect of a court approved composition scheme on unsecured creditors. Furthermore, the advantages and disadvantages of composition schemes are discussed from the perspective of both the debtor and creditors.

Since composition schemes in debt adjustment proceedings have been introduced since December 1998 and this regime deviates in several important respects from composition schemes in bankruptcy and suspension of payments proceedings, composition schemes in debt adjustment proceedings are more extensively examined. Debt adjustment proceedings have been introduced particularly in order to promote amicable settlements. The legislative regime should function merely as a fallback option, if parties fail to agree on an amicable settlement. This explains why the composition scheme in debt adjustment proceedings is more flexible and less strict in its design than the regimes pertaining to composition schemes in bankruptcy and suspension of payments proceedings.

In Chapter 3 the legal nature of composition schemes is discussed. On the basis of an analysis of parliamentary history, case law and legal literature the conclusion is reached that a composition scheme can be classified as a sui generis contract. Since composition schemes are governed by the formal contours of the Bankruptcy Code, the conclusion of composition schemes is principally governed by formal rules. Whilst a composition scheme can be classified as a contract, its conclusion is only partially governed by art. 6:217 of the Civil Code, as the conclusion of a composition scheme needs to occur in accordance with the procedure as set out in art. 138 et seq. of the Bankruptcy Code. If a composition scheme is adopted pursuant to art. 145 of the Bankruptcy Code, it needs to be approved by the court. This is a prerequisite for the composition scheme to be granted legal effect. Since composition schemes are governed by separate mandatory rules in the Bankruptcy Code, the classification of a composition scheme as a contract has barely any autonomous value. Consequently, the general law of obligations is conferred a mere inferior role with regard to the conclusion, legal effects and challenging of composition schemes. Nevertheless, it is examined in this chapter whether the formal rules pertaining to composition schemes can be complemented by the general law of obligations and if so, which specific rules of Book 6 of the Civil Code would be suitable for this purpose.

Chapter 4 concerns the content of a composition scheme. What can be agreed upon in a composition scheme? The answer to this question is not merely determined by the legal character of a composition scheme. The content of a composition scheme is not automatically governed by the principle of freedom of contract. Pursuant to art. 157 of the Bankruptcy Code, a composition scheme should be characterised as a cram down settlement. In determining the content of a composition scheme, the legitimate interests of dissenting creditors on which the composition scheme can be imposed and absent creditors should be taken into account. Moreover, the content of a composition scheme is in part determined by the precondition of a court approval ex art. 153(2) of the Bankruptcy Code. If no such approval is granted by the court, the composition scheme does not obtain legal effect. This essentially means that before submitting the composition scheme to the clerk's office of the district court, the debtor needs to examine the composition scheme in conjunction with the insolvency administrator against the background of art. 153 (2) of the Bankruptcy Code.

The Bankruptcy Code remains silent on the possible content of a composition scheme. The Code merely provides several indications of permissible composition schemes. In arts. 50,162 and 171 of the Bankruptcy Code, specific mention is made of the liquidation scheme and the payment plan, but these are not further elaborated. In legal practice, in particular payment plans are concluded pursuant to which creditors are classified (i) in groups and (ii) on the basis of the total amount of outstanding claims. Creditors receive partial repayment of their claims within each group. It appears from legal practice that the payment percentage is generally determined by the amount of the outstanding claim. Creditors with relatively small claims are occasionally discharged in full and can obtain a higher distribution rate than creditors who possess relatively large claims. It should be taken into account that all bound (unsecured) creditors rank on an equal footing. From the perspective of legal doctrines the aforementioned payment plans are in violation of the paritas creditorum principle. In general, a deviation from the paritas creditorum principle is only permitted insofar as a justification exists.

By examining the composition scheme concluded in the suspension of payments proceedings opened against Den Holder, the possible content of a liquidation scheme is analysed.2It is submitted that any property surrendered by the debtor constitutes a segregated patrimony. This conclusion is based on the general definition of a segregated patrimony and the underlying statutory regime. In the context of reacquisition of the debtor's dominion, the question is raised whether a liquidation scheme is in violation of the mandatory objection ground of art. 153(2) (2) of the Bankruptcy Code. In this chapter, the conclusion is reached that an irrevocable mandate or a transfer of the segregated patrimony should be put in place in order to counter the risk of a transfer of the property by a debtor pursuant to his dominion to a third party. The minimum content requirements of a composition scheme are discussed against the background of the composition scheme concluded in respect of the Wereld-ruiterspelen Foundation.3 Is it possible to exclude rights of creditors against third parties in a composition scheme? In this book such provisions are labeled as unfamiliar composition scheme provisions, since such provisions do not relate to the debtor's estate, but to that of a third party. These provisions can be included in a composition scheme, but have only a limited scope in legal effect. Pursuant to art. 6:217 of the Civil Code, only creditors who vote in favour of the composition scheme can be bound by such provisions. The mandatory scope of art. 157 of the Bankruptcy Code does not apply to such provisions.

The central theme of Chapter 5 is the conclusion of a composition scheme. The Bankruptcy Code provides for a separate procedure in art. 138 et seq. regarding the conclusion of a composition scheme. The law provides rules on the procedure to be followed as from the moment on which the composition scheme is submitted to the clerk's office of the district court until the mandatory court approval of a composition scheme. In this regard, special attention is drawn to the parties to whom the composition scheme should be offered and which creditors are entitled to vote on the adoption of the composition scheme. The position of unsecured creditors is examined as well as the positions of creditors with subordinated claims and creditors who can invoke a right of set-off. Subordinated creditors are classified by the underlying system of the Bankruptcy Code as creditors without a preference and are thus entitled to vote on the adoption of a composition scheme, notwithstanding the fact that subordinated creditors may not receive any or only a reduced distribution under the terms of a composition scheme. The same applies to creditors who can invoke a right of set-off. Despite the right of set-off, they remain unsecured creditors and thus they retain their right to vote on the adoption of the composition scheme (which does not preclude their right of set-off).

Adopted composition schemes need to be approved by the court. This procedure is discussed by examining the approval requirements of art. 153 of the Bankruptcy Code. The Supreme Court has held in its judgment in 2003 that a procedure in which court approval is sought cannot be characterised as a disputed court case, but as a procedure aimed at obtaining an expedient decision regarding the composition scheme.4 The court has a discretionary power to approve or disapprove a composition scheme.

At the end of Chapter 5, a brief elaboration is given on the European Insolvency Regulation and the consequences of its application on composition schemes governed by Dutch law. In particular, attention is drawn to art. 3(3) and art. 34(1) of the European Insolvency Regulation and their meaning on the conclusion and the legal consequences of a composition scheme under Dutch law.

Chapter 6 elaborates on the main legal consequences of a composition scheme. The most far reaching consequence is that pursuant to art. 157 of the Bankruptcy Code a court approved composition scheme can cause a cram down. This means that the composition scheme is binding on each unsecured creditor, irrespective of whether the creditor has voted in favour or against the composition scheme and regardless of whether he has participated in the proceedings. The binding effect on creditors ensures that the purpose of the composition scheme can be fulfilled. Several prerequisites that govern each composition scheme can be said to follow from the application of art. 157 of the Bankruptcy Code. These requirements are not enunciated in the law, but relate to the nature, purpose and scope of a composition scheme. For example, a composition scheme needs, in general, to adhere to the paritas creditorum principle and any deviation is only permitted if warranted by special circumstances. Furthermore, a composition scheme can, in principle, not deprive unsecured creditors of any rights which are conferred by the Bankruptcy Code, since a composition scheme has not been introduced by the legislator to surrender rights, but to acquire the highest possible distribution rate as possible under the relevant circumstances. This rule applies unless creditors unambiguously decide to surrender any particular rights.

Upon the termination of bankruptcy proceedings by means of a composition scheme, the remaining unpaid amounts of claims are automatically converted into non-enforceable claims. This explains why a composition scheme does not involve a gratuitous transfer or a surrender of a claim ex art. 6:160 of the Civil Code. In this respect, it is examined what the words "full discharge" encapsulate in a composition scheme. The question is whether a debtor whose bankruptcy proceedings have been terminated by a composition scheme can invoke the tax provision of art. 3.13 (1) of the Income Tax Act 2001. It has been submitted that it is desirable to answer this question in the affirmative, despite the fact that a composition scheme does not entail a discharge ex art. 6:160 of the Civil Code and that pursuant to case law it does seem that the surrender of a claim ex art. 3.13 (1) of the Income Tax Act 2001 is prevalent. After bankruptcy proceedings have been terminated by a composition scheme, all remaining unpaid amounts of claims are converted into non-enforceable claims. Pursuant to the scope of the tax provision of art. 3.13 (1) of the Income Tax Act 2001, no recourse can be sought against the debtor in collecting such claims. From that perspective it can be argued that a composition scheme should fall within the scope of application of art. 3.13 (1) of the Income Tax Act 2001.

Chapter 7 addresses the question whether a court approved composition scheme can be challenged. In this context, the dissolution of a composition scheme pursuant to art. 165(1) of the Bankruptcy Code is analysed. Which creditors can request the dissolution of a composition scheme? In part against the background of the case UPC/Movieco the question is raised which aspects should be taken into account by a judge in considering a dissolution request.5 The consequences are discussed of admitting or disputing a claim in bankruptcy or suspension of payments proceedings. In this respect, art. 157 and 274 of the Bankruptcy Code are elaborated on. It appears from the system of the Bankruptcy Code that the status of a claim in bankruptcy and suspension of payments proceedings in considering the dissultion request. The status of a claim can this no longer be altered in a dissolution procedure. Only in exceptional circumstances is the judge empowered to depart from this rule if the relevant party can invoke special circumstances which may render it plausible that the change of the status of a claim is justified.

The dissolution of a composition scheme by virtue of art. 165(1) of the Bankruptcy Code results in a reopening of the bankruptcy proceedings. The reopening of bankruptcy proceedings pursuant to art. 167 of the Bankruptcy Code does not entail a reopening of the proceedings in its true sense, since “new creditors”are also involved in the reopened proceedings. A comparison is made in respect of art. 167 of the Bankruptcy Code with the reopening of proceedings under art. 194 pf the Bankruptcy Code only creditors are involved in the proceedings who were creditors at the time of the original proceedings. The regime applicable to composition schemes does not include a provision for cases in which assets are discovered after the termination o f bankruptcy proceedings by the adoption of a composition scheme. Art. 194 of the Bankruptcy Code can be applied mutatis mutandis in such a situation.

Finally, in Chapter 8 attention is drawn to out-of-court settlements. An out-f-cours settlement can be described as a contract which comes into existence under general rules of the law of obligations. It is a contract between the debtor and its creditors, in which it is often agreed that the debtor will only partially pay claims. An out-of-court settlement distinguishes itself from statutory composition schemes in the sense that it is not governed by prescribed forms and formal mandatory rules. The conclusion of an out-of-court settlement is a matter of offer and acceptance ex art. 6:217 of the Civil Code. An out-of-court settlement is thus binding on creditors who have accepted the proposed settlement. Dissenting creditors cannot be bound by an out-of-court settlement. In legal practice, the refusal of a creditor to participate in an out-of-court settlement is considered to impede the success of an informal restructuring attempt. Since the 1990s many cases have been petitioned to the court in an attempt to oblige a dissenting creditor to accept an out-of-court settlement. This issue is discussed on the basis of case law. The basic assumption is that an out-of-court settlement is a contract and that Dutch law does in principle not encompass a forced acceptance of a contract. In 2005, the Supreme Court has explicitly endorsed the view that a forced acceptance of a contract is only permitted under exceptional circumstances.6 The Supreme Court has adopted a more strict benchmark than previous judgments of lower courts. Since 1 January 2008, art. 287a has been implemented in the Bankruptcy Code. This article can be considered as a codification of the aforementioned judgments of lower courts regarding the imposition of an out-of-court settlement on a dissenting creditor in debt adjustment proceedings for natural persons. By implementing art. 287a of the Bankruptcy Code, the legislator has made it clear that the strict requirements set forth by the Supreme Court in order to impose an out-of-court settlement, do not apply within the context of art. 287a of the Bankruptcy Code. The legislator purported to consequently promote the conclusion of out-of-court settlements in debt adjustment proceedings.

Despite the fact that the regime pertaining to composition schemes dates back to 1893, it has prevailed over time and the procedural rules require barely - or at least no substantial - statutory modification. This research shows that the regime does not lead to insurmountable hurdles in legal practice. At the time when the regime was adopted in 1893, the legislator kept the regime governing composition schemes simple and deliberately refrained from introducing more detailed rules in order to enhance the success rate of composition schemes. The liberty offered by the regime on composition schemes to the relevant parties can be considered an alluring feature of the regime. The law does not prohibit much, due to which a composition scheme can encompass a myriad of contractual provisions. Insofar as the statutory boundaries are respected, the formal framework in which a composition scheme is positioned enjoys the benefit and liberty of freedom of contract.

Although a substantial modification of the procedures applicable to composition schemes does not seem warranted, it is important that the scope of the regime be enhanced by binding all creditors to the composition scheme, not just unsecured creditors. In this respect, the regimes governing composition schemes in bankruptcy and suspension of payments proceedings would need to be modified along the lines of the regime applicable to composition schemes in debt adjustment proceedings. This would make composition schemes also binding on preferential creditors. My proposal is to impose the binding effect of a composition scheme on all groups of creditors. There seems to be no reasonable ground why only unsecured creditors should cover the loss of so called "group debt". In a special situation, as is the case in bankruptcy proceedings, each creditor has to bear the risk of unrecoverable value against the debtor. This thought can also be traced in American law (Chapter 11), where creditors can be bound by a composition scheme irrespective of possible existing priorities.

The introduction of a new power to impose composition schemes on all groups of creditors should be coupled with a reduction of the number of claims against the estate (i.e. administration claims) and the abolition of existing statutory preferences. Currently, the claims admission procedure is often omitted since the insolvent estate is depleted after the discharge of administration, secured and preferential creditors. Most bankruptcies are terminated due to insufficiency of assets which renders the restructuring by means of a composition scheme redundant. The above submissions are acknowledged in the proposed Insolvency Bill which was submitted to the Minister of Justice on 1 November 2007.