Securing multi-party cross set-off in bankruptcy
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Cross set-off grants the right to set-off a debt owed to one party against a claim on another party, though this must have been contractually agreed prior to any bankruptcy proceedings.
In the situation under review, 'X' had a debt to ‘A’, a company that was declared bankrupt. ‘Y’ had a claim on ‘B’, a sister company to 'A' that was also declared bankrupt.
Rather than paying its debt to 'A', 'X' wanted to set-off the debt against the claim that 'Y' had against 'B', claiming that it had been contractually agreed to enact such a cross set-off. However, this arrangement meant the claim and debt were not in the same 'hand' and the question was raised as to whether this was permitted.
Article 53 of the Dutch Bankruptcy Act (DBA) takes effect during bankruptcy and requires that the claimant has to be both debtor and creditor of the other party to employ a set-off.
So, does article 53 DBA prevent the arrangement of a cross set-off of a debt to one bankrupted party against a claim on another party, even if such right of set-off had been contractually agreed before the bankruptcy?
If this were the case, then debtor, 'X', would have to pay its debt to the bankruptcy trustee and the creditor 'Y', would have an unsecured claim in the bankruptcy.In its ruling, the District Court dismissed the claim of the party invoking the right to cross set-off on the basis that it had not proved the existence of such a specific right where the party was under bankruptcy proceedings.
The defendant had argued in the Court of Appeal that even if the cross set-off agreement had the effect the claimant had claimed, the last cross set-off cannot be permissible since company 'A' was declared bankrupt before this set-off. The defendant claimed that under the DBA it is not possible to carry out a cross set-off, because article 53 DBA requires the claimant to be both creditor and debtor of the bankrupt company.
The Court of Appeal confirmed the District Court's decision and decided that considering the claimant was only the debtor and not both creditor and debtor of bankrupt company 'A', the Court did not have to decide whether there is an agreement including the right of cross set-off at all. It applied Article 53 DBA to the letter.
The Supreme Court though, held that the reciprocity requirement of article 53 DBA is not mandatory law. Since it is possible for parties to amend the right to set-off outside bankruptcy, there are no grounds to deprive the effect of the agreement between the companies if one of the parties does go bankrupt.
Hence, article 53 DBA does not preclude a party invoking a stipulation that has been agreed upon before the opening of the bankruptcy proceeding. This includes a stipulation containing the right of set-off of claims and debts that originated before the declaration of bankruptcy, as well as of claims and debts resulting from legal relationships that existed before the declaration of bankruptcy. Importantly, this contractual extension can entail the right to set-off a debt against a claim that a different party has on a party other than the bankrupt company.
Our analysis
This decision is good news for multi-party contractual relations; for example, where various members of the same group of companies at the same time act as suppliers and customers of another company or group of companies. What is important, however, is that the contractual extension of the right to set-off is clear and unequivocally worded. In case of doubt, the party claiming the right to set-off must provide evidence of that right to the court failing which, its claim will be denied.