Setoff on the threshold of insolvency

Set off by the bank of claims on its client with payments received in the clients bank account not allowed if insolvency of the client is to be expected

In its judgment of 23 November 2018 (ECLI:NL:HR:2018:2189) the Supreme Court decided on a preliminary question asked by the District Court Gelderland. A Court may in any matter pending before it request the Supreme Court to answer a legal question by way of preliminary decision, in the event that an answer to this question is required to decide on the claim and is directly relevant:

1. for a number of claims which are based on the same or similar facts and result from the same or similar connected causes, or
2. to decide or bring an end to numerous other disputes resulting from similar facts, in which the same question occurs.

The case concerned Eurocommerce, a group of companies that developed large-scale office spaces for its own account and risk. After completion of the office space, Eurocommerce rented out the offices itself. Rabobank was one of the largest financiers of Eurocommerce and most payments were made to and from accounts Eurocommerce held with Rabobank. Eurocommerce had pledged its account receivables to Rabobank. In addition, Eurocommerce had granted Rabobank a disclosed right of pledge on any claim from the bank itself on each and every group company resulting from a credit amount in its bank account. In the period from 21 May 2012 to 6 March 2013 insolvency proceedings were opened in respect of the various companies in the Eurocommerce group. The bank was entitled to set off its claim on Eurocommerce with payments it received in respect of pledged claims from Eurocommerce on third parties. The case centred about the right to set off by the bank with payments made into the accounts by third parties in respect of claims that were not pledged to it. The court appointed insolvency practitioners claimed repayment from Rabobank of all amounts transferred to Eurocommerce's bank accounts by third parties in payment of claims that were not themselves pledged to the bank and which had been set off by the bank from the moment that Rabobank was no longer in good faith within the meaning of article 54 (and its counterpart in suspension of payment situations, article 235) of the Dutch Bankruptcy Act ('DBA'). Article provides that where a person has acquired from a third party, prior to the declaration of bankruptcy, a claim against the bankrupt debtor, he is not entitled to set-off if he did not acquire this claim in good faith; the same applies when a person has taken over from a third person, prior to the declaration of bankruptcy, a debt payable to the bankrupt debtor and he did not act in good faith at the time of the debt assumption. Good faith is deemed absent if, at the time of acquisition or assumption, the person who acquired the claim or assumed the debt knew that the future bankrupt was in such distress that his insolvency was to be expected.

The preliminary question to be answered by Dutch Supreme court was whether Rabobank, based on its right of pledge, was entitled to recover its claim from payments made by third parties to Eurocommerce (i.e. payments on claims that were not pledged to the bank) from the moment the bank knew that the insolvency was to be expected.

The Supreme Court reiterates the rule that a payment made by a third party into the bank account of the banks client is considered a debt assumption because by crediting the clients account the bank assumes a debt in the same amount towards the client. The bank may, in principle, set off this debt with its claim on the client within the current-account relationship with the client. In the event of an insolvency situation, however, set off is no longer allowed if the bank was not in good faith at the moment when it credited the client's account (and thus assumed the debt). This consideration is partly motivated by the argument that non-cash payment transactions may not give banks an exceptional position in the sense that they could independently recover their claims from what they owed the debtor despite the insolvency being imminent.

Article 54 DBA not only refers to the assumption of a debt to the bankrupt, but also to the transfer of a claim against the bankrupt. It follows from Dutch case law that the rule of article 54 of the DBA, insofar as it concerns the transfer of a claim against the bankrupt, also applies in the situation where a creditor of the later bankrupt debtor has stipulated a security right for all future claims of the creditor against such debtor and the creditor acquires a third party claim (which is unsecured) on the debtor. Just like set off of an acquired claim with a debt to the debtor, recovery of an acquired claim by exercising a security right is prevented if the creditor is not in good faith in the sense of article 54 DBA.

The ratio of the limitation of the right to set off provided for in article 54 DBA is the same when taking over a debt as when taking over a claim: the prevention of unjustified preferential treatment over other creditors.

In line with the above, recovery by way of a security right is also excluded in the situation where the creditor has stipulated such security right on the (potential) claim of the debtor against the creditor himself, and the creditor then takes over a third party's debt to the debtor. Also in this situation, should the creditor not act in good faith in the sense of article 54 DBA, not only the set off of an assumed debt with the claim of the creditor against the debtor is prevented, but also recovery under the security right from the debtor's claim on the creditor itself resulting from the debt assumption.

Based on these considerations, the Dutch Supreme Court holds that crediting the account as a result of a payment by a third party, for the application of article 54 DBA equals the assumption of a debt by the bank. This means that the preliminary question must be answered negatively.