Supervisory judge forbids liquidator to settle. Can this prohibition stand up?

In the Netherlands, in the event of a bankruptcy, the court appoints a liquidator. The supervisory judge then supervises the liquidator’s actions. For certain activities, including entering into settlements with parties on whom the estate has a claim, the liquidator also requires permission or authorisation from the supervisory judge. In this case, the supervisory judge denied permission to conclude a settlement. An appeal against this decision was then lodged with the Dutch court. Dutch insolvency lawyer and liquidator Sander Schouten explains this court case.

Dutch bankruptcy proceedings result in settlement

The laywer of the liquidator had started proceedings in this bankruptcy, claiming (among other things) payment of the shortage in the bankruptcy. The liquidator in these proceedings also lodged claims against parties other than the directors on grounds of fraudulent acts and impermissible settlements. Parties reached a mutual settlement during these proceedings. In the settlement, they decided that an amount of €35,000 would be paid, for which the liquidator would then have to grant final discharge to the parties on which he had laid claim.

Supervisory judge’s permission required for settlement

Based on article 104 of (Dutch) bankruptcy law, the liquidator is authorised to conclude settlement agreements or settlements with the approval of the supervisory judge. For that reason, the liquidator asked the supervisory judge for permission to conclude the settlement for the termination of the proceedings. After the examining magistrate had checked with the liquidator about how the other creditors viewed the settlement, the examining magistrate ultimately did not grant her permission for that settlement. The examining magistrate was not fully convinced that recovery from one of the parties laid claim to was impossible and believed, for that reason, that proceedings against that party should be continued. From a societal point of view, this was the most responsible decision, according to the examining magistrate.

Appeal of supervisory judge’s decision possible

The supervisory judge’s denial of permission for a settlement also constitutes a settlement. Based on article 67, paragraph 1 of Dutch bankruptcy law, the appeal of such a decision to the court is permitted. In order to lodge an appeal, a party must qualify as being a stakeholder in the sense of that article. Since the party involved was also a creditor in the bankruptcy, his appeal was admissible.

Creditors’ joint interest is paramount

The main question was then whether, under those circumstances, the supervisory judge properly denied permission in response to the liquidator’s request to conclude a settlement agreement with the appellant for the termination of the court proceedings. First and foremost, the Dutch court ruled, the liquidator’s job is to manage and to settle the estate, while the supervisory judge must supervise this. So in order to answer the key question, the court must assess solely whether the liquidator’s request for permission for the settlement was in the interest of the estate.

Dutch court: settlement is in the interest of the estate

The Dutch court answered this question in the affirmative, and would appear to be making a particular issue of the supervisory judge’s paucity of justification for the decision. The fact that the two largest creditors – the Dutch tax authority and national bank – were prepared to agree to the proposal also played a role. Moreover, in the context of reaching the settlement, the liquidator had also stipulated that, if the party under claim had provided false information about his position of recovery, that the settlement could then be dissolved nonetheless. According to the court, the conclusion of the settlement was indeed in the interest of the estate. Therefore, the court overturned the supervisory judge’s decision and still granted the liquidator permission to conclude the settlement.