At a discussion in Brussels, a few weeks ago, a non-Dutch expert strongly argued that throughout the last decades the Netherlands had been extremely territorial in its approach to non-Dutch insolvency proceedings. They would always put their own local creditors first and he voiced his disagreement rather loudly. Indeed, the Dutch being ‘territorial’ is generally viewed as something negative by the international insolvency community. However, this position has changed drastically, although the Supreme Court in 2013 still used the term ‘territoriality’. Confusing indeed. Let me try to explain.
Historically, on a global scale, the issues to be solved concerning cross-border insolvencies have been approached from two perspectives. The first is that insolvency proceedings should be seen as unique, reflecting unity of the estate. The proceedings should include all the debtor’s assets, wherever they are located in the world, and should be decided on by one court. According to this approach, the whole estate should be administered and reorganised or liquidated based on the laws of the country in which the debtor is domiciled (or has a registered office or similar reference location) and in which the proceedings were initiated. The applicable law for the proceedings and for the legal and procedural consequences is the law of the State in which the insolvency measures were issued. This doctrinal perspective is known as the principle of unity or universality (or: universalism). The second, contrasting doctrinal perspective is based upon the idea that the respective insolvency measure will only have legal effect within the jurisdiction of the State in which a court commenced insolvency proceedings. The legal effects of these proceedings will therefore stop abruptly at this State’s borders. The limitations these proceedings will bring to a debtors’ legal authority to administer his assets are not applicable abroad (ie. outside these borders). Assets of the debtor located in other countries will not be affected by these proceedings and the administrator who is appointed will not have any powers abroad. This doctrinal perspective is known as the principle of territoriality (or: territorialism).
In September 2013 the Netherlands Supreme Court once more had to decide in the matter of the insolvency of Russion Oil giant Yukos, and it clarified that the appointed Russian trustee (Mr Rebgun) may in principle exercise the power to sell the debtor’s assets located in the Netherlands (share in a Dutch BV), that were conferred on him under the foreign (Russian) law (lex concursus), see Netherlands Supreme Court 13 September 2013, ECLI:NL:HR:2013:BZ5668. The Court considerered (in my translation):
‘3.2.1. The Supreme Court in its judgment of 19 December 2008, ECLI:NL:HR:2008:BG3573, held that, insofar as has not been decided otherwise in pursuance of an international regulation that is binding to the Netherlands, a bankruptcy declared in a different country has territorial effect, not only in the sense that (a) the bankruptcy attachment levied on the assets does not also include the assets situated in the Netherlands, but also in the sense that (b) the legal consequences of the bankruptcy law of that other country be attached to bankruptcy cannot be invoked in the Netherlands in so far as they might result in unsatisfied creditors no longer being able to take recourse – either during bankruptcy or after the bankruptcy – against the assets of the (former) bankrupt debtor, that are situated in the Netherlands. (c) The principle of territoriality does not obstruct the operation in the Netherlands of other consequences of a bankruptcy proceeding opened abroad.
3.2.2. These rules, in which the decision of three previous judgments is repeated (Netherlands Supreme Court 2 June 1967 …, Netherlands Supreme Court 31 May 1996 …, Netherlands Supreme Court 24 October 1997), imply with respect to a bankruptcy opened abroad (assuming that judgment was not established in a manner which is contrary to Dutch public policy) that the trustee in that bankruptcy in principle also with respect to the assets situated in the Netherlands and belonging to the bankruptcy estate – but which are not encumbered by the bankruptcy attachment – can perform acts of administration and disposal, provided that the trustee is empowered to do so under the laws of that other country (line (c)).
Accordingly, the foreign trustee can, if he derives the power to do so from the lex concursus, alienate the assets located in the Netherlands and have the proceeds benefit the bankruptcy estate, on the understanding that by rule (a) attachments levied up to the moment of transfer must be respected, as those assets do not fall under the bankruptcy attachment. Rule (b) does not stand in the way of the above. In order to do justice to that rule it is sufficient that, as long as during or after the bankruptcy assets belonging to the (former) bankrupt debtor are situated in the Netherlands, unsatisfied creditors can take recourse against them. Rule (b) does not extend so far that those assets would have to be kept fully out of the normal settlement of the foreign bankruptcy. The territoriality principle does not preclude that the power to dispose of the debtor transfers to the foreign liquidator, so he can also liquidate the assets located in the Netherlands – respecting the attachments levied thereupon in the meantime – for the benefit of the joint creditors.’
One of the weaknesses of the Dutch international insolvency framework is that it does not contain a system of international insolvency law for cases beyond the scope of the EU Insolvency Regulation. The Dutch system, as explained by the Supreme Court above, still adheres to the territoriality principle, expressed in the line: ‘Pursuant to the principle of territoriality a foreign insolvency proceeding has no effect in the Netherlands’. Ten years ago I already doubted whether cases of the Dutch Supreme court could indeed be interpreted leading to the cited result. In the decision cited above, the Court limits the territoriality principle to its mirror image: sheer universality! In the Yukos case the Dutch Supreme Court considered the position of the Russian trustee appointed in a Russian insolvency proceeding regarding Yukos. Was the trustee authorised to sell and transfer shares Yukos held in a Dutch BV? These shares were a part of the Russian estate. The Supreme Court decided that the Russian trustee was indeed authorised to transfer these shares if Russian insolvency law would allow this. In the Supreme Court’s view there is only one exception, i.e. the foreign insolvency proceeding violates Dutch public policy, the question of which is still pending at lower court level.
As demonstrated above, the Court goes into quite some detail to explain the Russian trustee’s position. The result of the case is that – outside the scope of the European Insolvency Regulation – a foreign insolvency office holder can effectively exercise its powers in the Netherlands, provided that his actions follow on from the law of the country in which the proceedings were opened and respect all existing individual creditors’ attachments on assets located in the Netherlands. The foreign trustee can act in the Netherlands without prior court decision on for instance recognition of its foreign proceeding or relief (as is required under the UNCITRAL Model Law and which is the system e.g. in England, Belgium and Germany), or for instance an exequatur. The only defence interested parties have is the submission that an action of the foreign trustee is against Dutch public policy. The Yukos judgment therefore results in its effects in universality: the Netherlands is open for foreign insolvency proceedings. This is quite confusing, where the Supreme Court uses the words ‘the principle of territoriality’. The Swiss Supreme Court (Bundesgericht) understand its Dutch colleagues’ decision even better than the drafting judges themselves do. In a March 2015 judgment the Swiss Court rightly notes that the Dutch Supreme Court follows the principle of universality and adds, that in the light of the applied reciprocity between Netherlands and Switzerland it would be ‘stossend’ (shocking) if the Dutch administrator would not be able to pursue his claim in Switzerland.
As indicated, the discussion took place in Brussels. Travelling home, my thoughts drifted to the well-known painting by René Magritte: a pipe, with the caption: ‘ceci n’est pas une pipe’ (This is no a pipe). Indeed it is not a pipe, but it is the picture of a pipe. The Dutch Supreme Court presents a picture of a pipe, which is indeed not a pipe.