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The intended trustee in Dutch pre-pack: from fly on the wall to spider in the web

The draft bill of the Continuity of Enterprises Act I assigns a significant role to the intended trustee in Dutch pre-pack proceedings. But what exactly is the position of this main figure and what does the job description include?

Introduction

The pre-pack method in Dutch insolvency proceedings has received much attention over the past few years. Pre-pack procedures are a ‘tool’ to prepare and enable the swift transfer of an undertaking following a declaration of insolvency. In Dutch literature, the position of the intended trustee (in Dutch: 'beoogd curator') in these proceedings has been elaborately discussed. The intended trustee prepares the transfer of the undertaking and will (usually) be appointed as the actual trustee once the company is bankrupt. The preliminary draft of the Continuity of Enterprises Act I ('Wet continuïteit ondernemingen I (WCO I)), in which the pre-pack method is legally established, portrayed the intended trustee as a fly on the wall. Essentially, his task within the preparation process would amount to merely being informed and having studied all documents in order to realise a quick restart after the company’s bankruptcy. Practice has shown, however, that the intended trustee is strongly involved in the approaching of and negotiating with potential takeover candidates. Consequently, many Dutch legal scholars have criticised the job description of the intended trustee its lack of clarity.

Therefore it is welcomed that, compared to the preliminary draft, the current draft bill of the WCO I describes the position of the intended trustee as a spider in the web. According to the legislature, the intended trustee has a greater responsibility in pre-pack administrations than the liquidator in a regular bankruptcy due to the lack of transparency and involvement of creditors. The intended trustee must therefore (only) be guided by the interests of all creditors. As shown below, the current draft bill of the WCO I has deployed several guarantees to safeguard the proper exercise of the intended trustee’s responsibility towards these creditors.

Independence

It is of vital importance that the intended trustee is independent of the debtor. Under Dutch law the intended trustee is always appointed by the Court. This supervision of the Court ensures that the intended trustee will not be able to favour preferential creditors, as a result of which the position of the unsecured creditors is better guaranteed. Moreover, the independence of the intended trustee is strengthened by the fact that he is not bound by the instructions of the debtor. This is contrary to English law, which allows for not only the court-ordered appointment of an administrator, but also the appointment by a floating charge holder, the company or its directors. The idea behind the right of a company to appoint an administrator is that it serves as an incentive for the directors to take action when the company is in dire straits.

Active role

Although the intended trustee is limited in his possibilities to exercise power, as he is not authorised to manage and dispose of the estate, the legislative framework does allow him to participate actively in the process of preparing the transfer of the undertaking. For example, the intended trustee will have to act when the preparation process threatens to put the interests of the joint creditors at a disadvantage. In addition, he is expected to play an active role in the sales process of the troubled company: he shall ensure a fair process, he must identify potential takeover candidates and he has to come up with a reasonable sales price. Moreover, he has to identify the effects that the restart will entail for the joint creditors. Lastly, the intended trustee has a duty to monitor the possibility of bankruptcy fraud, and he is expected to intervene when fraudulent behaviour occurs. At the request of the debtor he may even play a more active role.

Information delivery

The debtor is under an obligation to provide the intended trustee with all information that he needs to safeguard the interests of the joint creditors. In two ways the intended trustee can enforce obtaining this information. Firstly, he can resign from his position when he is being hampered in the performance of his duties. It is not in favour of the debtor to obstruct the intended trustee in such a way that the pre-pack procedure will be ended, mostly because of the fact that the intended trustee has been designated at his request. Secondly, a liquidator in a regular bankruptcy may request the Court for an injunction to ban the debtor from the board, when he seriously fails in his duty to cooperate with the liquidator. The way I see it, this will also apply to an intended trustee in pre-pack procedures as soon as the draft bill WCO I enters into force.

Liability

If the intended trustee nevertheless has performed his duties improperly, joint creditors should be able to hold the trustee liable for his actions. The intended trustee cannot be held liable in his capacity (qualitate qua) since he is not authorised to manage and dispose of the estate as an actual liquidator. Possibly, the Supreme Court might allow for liability qualitate qua in future case law because of the new legal basis of the intended trustees’ position. Nevertheless, at this moment personal liability remains the only option for joint creditors. The standard for personal liability that applies to the intended trustee has recently been determined by the Dutch Supreme Court. The intended trustee must be guided by the interests of the joint creditors and must also take social interests into account, including the interest of employment (in that regard, see the draft bill Transfer of undertakings in bankruptcy). Therefore, the so-called ‘’Maclou’’ standard for personal liability of a (regular) liquidator should be deployed also for the intended trustee. This standard means that a liquidator should act as may reasonably be expected from a liquidator who has sufficient insight and experience and who should perform his duties with precision and diligence.

Conclusion

The current draft bill WCO I offers a well-defined framework for the intended trustee in which he is able to perform his task. He is expected to take action in various phases of the preparation process. Also, he is sufficiently independent of the debtor. It is to be welcomed that the intended trustee is not just a fly on the wall within a pre-pack administration, for he has a great responsibility towards the joint creditors. As the draft bill offers plenty of guarantees, the intended trustee will be sufficiently capable of exercising this responsibility.

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This blog is the result of an assignment in the master’s course Privatissimum Civil law, under the supervision of Dr Jeroen van der Weide. The subject of the course was (inter)national insolvency law and proprietary security rights law. In this course, students were asked to write a blog text about the draft bill of the Continuity of Enterprises Act I. The best blog would be published on the Leiden Law Blog. The author’s blog was selected as one of the ‘winning blogs’ and was thus invited for publication on the Leiden Law Blog. The author sincerely thanks Dr Jeroen van der Weide for his valuable feedback on previous versions of this blog.

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