Hoofdstuk 10 English summary

The main purpose of bankruptcy is to liquidate the debtor’s assets so that the net proceeds can then be distributed among the joint creditors. The starting point for the distribution is the paritas creditorum laid down in Article 3:277 of the Dutch Civil Code.

When it comes to equality between creditors in bankruptcy law, this rule is usually used as reference.

In the literature, the paritas creditorum is not only given a role in the distribution of the net proceeds in the distribution phase of a bankruptcy but also in the “twilight period” before bankruptcy and in the period from the debtor’s declaration of bankruptcy to the time at which the distribution takes place.

In the literature, opinions are divided as to whether the paritas creditorum is an important principle of insolvency law. On the one hand, there are writers who seem to make the importance of the paritas creditorum dependent on its practical relevance. If the distribution percentages of the competing creditors are high, the paritas creditorum comes heavily into play, and it is an important rule. If the distribution percentages are low or null, the opposite applies. I have referred to this as the economic approach to the paritas creditorum. Based on the economic approach (given the relatively low average distribution percentages to competing creditors in a bankruptcy), the distribution rule of the paritas creditorum is rather limited in practice.

On the other hand, there are writers who separate the importance of the paritas creditorum from the economic reality. The paritas creditorum is a fundamental starting point regardless of its economic relevance. In the literature, this statement is sometimes substantiated by pointing out the connection between rightful shares and the paritas creditorum. I have referred to this as the meta-legal approach to the paritas creditorum.

It is subject to discussion whether the paritas creditorum has a reason to exist under Dutch law, because the distribution percentages to competing creditors in the event of average bankruptcy are relatively low. If the paritas creditorum – in addition to being a distribution rule – has other functions, this may be its reason to exist. Whether there are other functions was further examined by performing a legal analysis using the legal-dogmatic research method. The paritas creditorum also has a reason to exist if a supporting meta-legal function can be proven. To this end, a prescriptive theory seems obvious, namely the implicit assumption of the legislature that a division in a bankruptcy with the paritas creditorum as the main rule is just. In order to know whether this theory is correct, a descriptive review was done. This review was done by means of an empirical study into the type of distribution of creditors involved in a bankruptcy situation, perceived as just whereby the paritas creditorum was one of the types of distribution submitted.

In light of the problem definition, the following research questions have been formulated. The central question was: does the paritas creditorum have a reason to exist in the context of a (Dutch) bankruptcy? The question is divided into the following sub-questions:

This thesis focused on a multiple positioning of the paritas creditorum. The first determination concerned the function(s) which the paritas creditorum has in bankruptcy law. The second positional determination concerned the question of whether the paritas creditorum has a meta-legal function. In addition to a legal theoretical interest (first positioning), the research therefore also had a social interest (second positioning).

In the context of answering sub-questions 1.1 and 1.2, Chapter 2 deals with the operation of the paritas creditorum in property law and with the exercise of the paritas creditorum in individual foreclosure law.

The paritas creditorum, as laid down in Section 3:277 of the Dutch Civil Code, is a distribution rule whereby creditors are entitled to a pro rata share of the net proceeds after the priority rights have been settled. The paritas creditorum is dealt with exclusively in the distribution of the proceeds (and not in the period shortly before the attachment or in the first phase of the attachment).

The paritas creditorum has relatively many exceptions. These exceptions fall into five categories (priority on the basis of pledge and mortgage, priority on the basis of privilege, other reasons of priority recognised by law, actual priority and the improper privilege attached to the claim for payment of foreclosure costs). If a claim of a creditor falls into one of these five categories, this leads (de jure or de facto) to a higher ranking in the distribution of the foreclosure proceeds. In addition, the claim of a creditor may have a lower rank than the rank to which a creditor is entitled on the basis of the paritas creditorum in the event of actual subordination. The extent of the exceptions places the meaning of the paritas creditorum into perspective as the main rule.

The paritas creditorum pursuant to Article 3:277 of the Dutch Civil Code applies in the individual foreclosure law in the case of an attachment foreclosure in which two or more creditors participate and the proceeds of the foreclosure, after payment of the costs, are on the one hand sufficient to satisfy the creditors with a right of priority, but on the other hand insufficient to satisfy all creditors. In addition, the parties do not have to reach an agreement after mutual consultation. In the context of the subsequent ranking scheme, the court must take account of Article 3:277 of the Dutch Civil Code when drawing up the statement of distribution. It is therefore only under very specific circumstances that the paritas creditorum has direct significance in individual foreclosure law.

In the individual foreclosure law, the paritas creditorum has a formal function and a material function. The formal function is to ensure equal treatment of creditors who cannot invoke a right of priority and whose claim is not subordinated. This equal treatment implies that the same apportionment criterion applies to all competing creditors. The material function means that the net proceeds are distributed in proportion to the claims of the creditors concerned.

The paritas creditorum has no function in the context of the individual foreclosure law in the period prior to the attachment.

A brief exploration of the history of the law has revealed that the paritas creditorum traditionally seems to have had the function of a distribution rule in the context of a concursus creditorum. In addition, the paritas creditorum may have had a second function in Roman times, namely to monitor the equal treatment of creditors from the time of the missio in bona (the seizure of property).

Finally, it has been established that the paritas creditorum has no function in the context of the foreclosure law in the context of the elaboration of Article 1 of the Dutch Constitution.

In Chapter 3, the focus shifts from individual enforcement law to bankruptcy as an important insolvency measure in collective foreclosure law. Chapters 3, 4 and 5 also discuss in more detail the legal function of the paritas creditorum in the context of a bankruptcy. In this context, it was also examined what the system of equality rules in the context of a (Dutch) bankruptcy, in which the paritas creditorum has a place, entails. Chapter 3 deals more specifically with these questions in the context of the first phase, the management phase, of a bankruptcy.

The bankruptcy procedure is based on the (formal) principle of the equality of creditors. The purpose of this principle is to protect the interests of bankruptcy creditors. Bankruptcy creditors who are in a similar situation should also be treated equally. In the event of bankruptcy, the position of a creditor in the context of an individual execution of an attachment is the dominant perspective for the question of whether there is a similar case.

In the management phase, the principle is expressed in particular in Article 26 of the Fw (in conjunction with 110 Fw). Competitive and preferred bankruptcy creditors are treated equally because they can only participate in the bankruptcy proceedings by submitting their claim under Article 110 of the Fw.

Creditors with a property right are – compared to bankruptcy creditors – an unequal case. The same applies to bankruptcy creditors with a passive obligation, namely to tolerate or not to do so. They have claims that are comparable to a creditor in the context of a real foreclosure. Separatists are also an unequal case compared to bankruptcy creditors. They are not entitled in the context of the execution of the seizure, but in the context of the ready foreclosure. Finally, an unequal case is also a creditor with an obligation that is not eligible for verification, while there is no estate obligation. Nor would such a claim be taken into account in the context of a seizure.

The same applies to estate creditors who have entered into a bankruptcy arrangement other than the bankruptcy creditors in this arrangement in the management phase, on the understanding that they cannot assert their rights by filing their claim for verification. Through the bond of reasonableness and fairness, which is reflected in Article 3:12 of the Dutch Civil Code, the principle of the equality of creditors in that relationship is expressed as a rule.

The principle of the equality of creditors is also reflected in the rule of equality formulated by the Supreme Court. This equality rule gives substantive expression to the principle of the equality of creditors, in particular by determining whether a creditor rightly does not join the group of bankruptcy creditors who submit their claim under Article 26 Fw for verification. The purpose of the equality rule is to avoid preferential treatment.

The paritas creditorum pursuant to Section 3:277 of the Dutch Civil Code is not available in the management phase. This is a distribution rule that only becomes applicable once distributions are made to creditors of the debtor in the context of the distribution of the proceeds.

Chapter 4 deals with a specific part of the management phase, namely the part in which the receiver pays attention to the reconstruction of the estate.

A distribution of the net proceeds during bankruptcy can be seriously disrupted by certain (legal) actions of the debtor in view of the bankruptcy. Under certain circumstances, the liquidator may use instruments (such as the bankruptcy pauliana) to remove this disadvantage and to reconstruct the ability to recover from the situation prior to the damaging acts.

Some measures under this reconstruction specifically protect the equal treatment of creditors and thus prevent a creditor from improperly improving his position in the context of the distribution during the twilight period before bankruptcy. Such measures are rules that (partly) reflect the principle of equality of creditors in the period before the declaration of bankruptcy. This concerns the bankruptcy pauliana, laid down in Articles 42 (albeit limited to the variant) and 47 Fw as well as the prohibition on set-off laid down in Article 54 Fw. Apart from these measures, the principle of the equality of creditors does not apply to the declaration of bankruptcy.

The paritas creditorum laid down in Section 3:277 of the Dutch Civil Code does not apply in the period before bankruptcy. The paritas creditorum therefore has no function during this period.

In light of questions above, Chapter 5 discusses the role of the paritas creditorum in the distribution of income during a bankruptcy.

The paritas creditorum has no significance if the bankruptcy judgement is set aside after opposition, appeal or cassation. Nor is the paritas creditorum important in the context of the simplified settlement of a bankruptcy. The paritas creditorum also has no function in a bankruptcy if a bankruptcy is terminated by conversion into the debt rescheduling scheme (WSNP).

The paritas creditorum pursuant to Article 3:277 of the Dutch Civil Code is a distribution rule in the distribution phase of a bankruptcy. In that case, it means that – if a verification meeting has been held, the final distribution list has become binding, and payment has been made to all creditors ranked higher – the competing creditors are equal to the remaining asset.

The paritas creditorum applies in principle by analogy in the context of the settlement of a bankruptcy in the absence of benefits, provided that, on the one hand, there are benefits to be distributed to the competing estate creditors but, on the other hand, those benefits are not sufficient to fully satisfy the competing estate creditors. In that case, the paritas creditorum also fulfils the function of a distribution rule.

In the context of an agreement, the realised income of the estate does not have to be distributed on the basis of the paritas creditorum as a heteronomous distribution rule. The paritas creditorum is applied by analogy to the homologation in the context of the assessment on the basis of Article 153 Fw, albeit only as a model standard from which derogations can be made to a certain extent. Also as a model standard, the paritas creditorum has the character of a distribution rule.

The principle of the equality of creditors is not only expressed in the paritas creditorum. This principle is also reflected in several other rules relating to the equality of creditors. For example, these rules ensure equal information rights. However, these equal information rights are sometimes limited in the context of proceedings against the bankruptcy declaration in favour of another principle of equality (expressed in Article 19 DCCP). In addition, the principle is reflected, for example, in the right of creditors to object to a distribution list that does not respect equal treatment. In the context of an agreement, the principle is expressed in several rules, such as the rule that the agreement must be refused homologation if the agreement has been reached by favouring one or more creditors.

Chapter 6 provides an interim assessment of the legal aspects of the study.

The function of the paritas creditorum during a bankruptcy (seen only from the legal perspective) is mainly the material function (i.e. the distribution rule whereby the net proceeds are distributed in proportion to the claims of the debtor’s competing creditors). The reason for the existence of the paritas creditorum is linked to this function. If there is no need to maintain the proportionate distribution rule, the paritas creditorum could be removed from bankruptcy law.

It therefore depends on the answer to the second sub-question (does the paritas creditorum have a meta-legal function in the context of a (Dutch) bankruptcy, in the sense that the paritas creditorum provides the highest distributive justice compared to other common distribution norms?) of whether meta-legal interests provide the rule with a reason to exist in bankruptcy law.

Chapter 7 focuses on this (possible) meta-legal function.

People prefer distributions that they perceive as just. In this context, the dominant preferences are a distribution based on equity, equality or need. The dominant preference also depends on the situation in which the distribution standard is applied. If there is no close personal relationship between people, scarcity exists and a long-term relationship is lacking, there is a preference for equity as a distribution standard. A distribution based on the paritas creditorum is one of the possible distributions that falls within the spectrum of the equity standard. The question of whether the paritas creditorum is the preferred standard for creditors can only be answered after empirical research has been conducted. This empirical study has been done.

The research question in the context of this study was: does equity, compared to the distribution norms of need, equality and a mixed form of need and equity, in various situations (varying with the relative size of the claim and the need) always yield the highest (perceived) distributive justice in the event of a distribution in the context of a bankruptcy?

The hypothesis (H1) was that the apportionment in a bankruptcy situation is judged to be fairer if it is based on equity than if it is based on equality, need or a mixed form of need and equity, regardless of the size of the claim and/or the needs of the creditor.

The population was formed by all (adult) Dutch people. 174 people (n=174) participated in the study on a voluntary basis. Participants received a questionnaire. By means of the questionnaire, fourteen situations (also called vignettes) were presented to the respondents – on the basis of a case – in which proceeds were distributed to two creditors according to a certain distribution key (equity, equality, need or a mixed form of need and equity, hereinafter referred to as: mixed). There were two dependent variables. A distinction has been made per vignette between the fairness of a distribution and the appropriateness of a distribution.

The distribution standard used in the vignettes (equity, equality, need of mixed) formed the independent variable. A “within-subjects” experimental design was applied. The independent variable (the distribution standard) was manipulated by means of the vignettes. A Repeated Measures Design was used.

The results of the two analyses showed that equity always gives a significantly higher score on the dependent variables in all compared conditions. The hypothesis has therefore been confirmed.

This means that a distribution on the basis of equity (which also includes a distribution on the basis of the paritas creditorum) yields the highest (perceived) distributive equity compared to the other three distribution norms.

In Chapter 8, the central question is answered as follows.

The empirical study shows that, in the event of a distribution in the context of a bankruptcy, a pro rata distribution yields the highest observed distributive justice. A division on the basis of the division rule of the paritas creditorum laid down in Article 3:277 of the Dutch Civil Code therefore has a meta-legal function.

In line with this finding, it has been established that the paritas creditorum has a reason to exist, despite the fact that relatively little of this rule is applied. This reason to exist lies in the fact that this rule has a meta-legal function and lies more specifically in the fact that the rule is to a large extent perceived as just. After all, the characteristic of moral rules is that they have a reason to exist independently of their economic significance.