Can a cash payment made after the bankruptcy date be reclaimed?
Recently, the Supreme Court issued an interesting judgment involving two important principles of bankruptcy law, namely the principle of fixation and the principle of paritas creditorum. The case concerned a situation in which, after the bankruptcy date, a cash payment was made from the bankrupt’s bank account to a creditor. The central question was whether the trustee could recover the payment from the creditor. This article discusses the case, the relevant principles and the Supreme Court’s opinion.
Giro payment by bankrupt to creditor after date of bankruptcy
The case that gave rise to the judgment is straightforward. Bleiswijk Boeketservice B.V. (hereinafter ‘BB’) has been declared bankrupt. A day later, on the basis of a direct debit, a debit is made from BB’s bank account in favor of a creditor, Flora Holland. At the time of the bankruptcy declaration, the balance on BB’s bank account was already negative. There was no possibility of a reversal.
The bankruptcy trustee claimed the payment back from the creditor on the grounds of undue payment. The creditor takes the position that it is not obliged to repay.
The fixation principle in bankruptcy law
Article 23 Bankruptcy Act provides that the debtor loses by operation of law the disposal and management of his assets belonging to the bankruptcy as of the day (counting from 00:00 hours) on which the bankruptcy is declared. This is an elaboration of the fixation principle. In addition to the loss of the debtor’s power of management and disposal, the principle entails that the legal position of all those involved in the estate becomes unchangeable as a result of the bankruptcy. Article 20 of the Bankruptcy Act provides that the bankruptcy includes the debtor’s entire assets at the time of the bankruptcy declaration, as well as what he acquires during the bankruptcy. This article of law also expresses the fixation principle.
When can a cash payment made after the bankruptcy date be reclaimed?
In the 2015 JPR/Gunning q.q. judgment, the Supreme Court ruled with respect to non-cash payments that the trustee can always recover the payment that was credited to the creditor’s account only after the bankruptcy situation occurred.
In the case discussed, the trustee argued on the basis of Article 23 Bankruptcy Act that BB could no longer perform legal acts affecting its assets as of the declaration of bankruptcy. Therefore, according to the trustee, the payment to the creditor was unjustified and the creditor must repay.
Proceedings concerning recovery by trustee of non-cash payments
The Subdistrict Court rejected the claim of the trustee. On appeal, however, the trustee was proven right. The Court of Appeal referred to the JPR/Gunning q.q. judgment of the Supreme Court and observed that this judgment does not state that the trustee’s authority to recover amounts is limited to non-cash payments to the credit balance of a bank account. According to the Court, such a limitation would also be in conflict with the fixation principle, the purpose of which is that the legal position of a creditor may no longer be changed in its favor (as regards amount and priority of the claim) after the bankruptcy has occurred. At the Supreme Court, the creditor is proven right again: the judgment of the Court of Appeal is set aside and the ruling of the subdistrict court is upheld.
Why can’t payments made after the bankruptcy date be reclaimed?
The Supreme Court’s opinion seems surprising: if a payment is received from a bankrupt, why does it not have to be repaid to the trustee? This has to do with Article 24 Bankruptcy Law, which states:
“For the obligations of the debtor, arising after the declaration of bankruptcy, the estate is not liable except to the extent that it has benefited as a result thereof.”
When executing a giro payment through a bank account, this leads to a lower balance on the same bank account. If there was already a negative balance, the negative balance becomes even lower.
No obligation to repay if the payment does not lead to a reduction of estate assets or an increase of estate liabilities
The Supreme Court considered that the payment in the case at hand did not lead to a reduction of the estate assets, because the bank account already had a debit balance when the bankruptcy commenced. Nor did that payment result in an increase of the estate’s liabilities, according to the Supreme Court. Although the debt to the bank has increased as a result of the payment to the creditor, the estate is not liable for that pursuant to article 24 Bankruptcy Act. After all, the estate has not benefited from the payment. The fact that the estate is not liable means that the bank will not be able to submit a claim in the bankruptcy for compensation of the amount transferred to the creditor.
The fixation principle and Article 23 of the Bankruptcy Act therefore provide no basis for granting the trustee’s claim.
The principle of paritas creditorum in bankruptcy law
The principle of paritas creditorum entails that debtors of equal rank should be treated equally in the satisfaction of their claims from the proceeds of property of the debtor. According to BB’s trustee, this principle is breached because one creditor gets paid and the other creditors do not.
A reliance on this principle cannot help the trustee either. The Supreme Court considered that the payment did not take place from an asset of the estate and that therefore no claim against the estate arose. According to the Supreme Court, there is therefore no question of an impermissible breach of the paritas creditorum.
Would the outcome have been different if the balance of the bank account was positive?
The outcome would have been different for the trustee if the payment had been charged to a positive balance on the bank account. After all, in that case an asset of the estate would have been reduced.
Looking for a lawyer in bankruptcy law in Rotterdam?
If you need legal assistance in disputes with a bankruptcy trustee or would like to obtain advice in the field of bankruptcy law, please contact Peter de Graaf. We will be happy to tell you more about the principle of fixation, the principle of paritas creditorum and the regulations concerning the recovery of giro payments by a bankruptcy trustee.
The judgment discussed can be found here.
