August 24 2012
Fundamentals of the existing act
Extension of the existing act to bankruptcy situations
The Netherlands is developing into an important forum for collective settlement of mass claims. Although Dutch law does not provide for a US-style class action procedure, it has had a collective settlement procedure on an opt-out basis since 2005. In December 2011 a bill was submitted to Parliament that included a proposal to apply the existing Collective Settlement of Mass Claims Act to bankruptcy situations.
Fundamentals of the existing act
The act entered into force on July 27 2005. Its purpose is to encourage and facilitate the settlement of multiple claims for compensation in connection with the same event at an earlier stage. It provides an opportunity for the parties to a settlement agreement to submit a joint request to the Amsterdam Court of Appeal to declare the agreement binding. The agreement must be concluded between:
If the court declares the settlement agreement binding, the agreement binds all persons covered by its terms, unless such persons decide to opt out in writing within a certain time after the binding declaration. The opt-out period is to be determined by the court, but should be at least three months.
Before deciding on the binding declaration, the court will assess whether the foundation or association representing the injured parties is representative, and whether the settlement is reasonable.
Notification of the injured parties is essential – both at the stage of the litigation aimed at obtaining a binding declaration and after the binding declaration has been issued. The binding effect of a settlement agreement is regarded as acceptable only if the injured parties have been properly notified at both stages, and thus have had an opportunity to object and to opt out.
Extension of the existing act to bankruptcy situations
On February 14 2011 a first draft of the bill was published, following an evaluation of the existing act, through which it transpired that there was a need for supplementary measures in order to increase parties' willingness to negotiate and arrive at a collective settlement. It was only in a later version of the bill, submitted to Parliament on December 22 2011, that the act was extended to bankruptcy situations. According to this bill, the remedies under the act could also be available in the case of bankruptcy. This proposed extension arises from the bankruptcy of DSB Bank. DSB was declared bankrupt on October 19 2009. As the bank allegedly violated its duty of care towards certain customers, the DSB bankruptcy may involve tens of thousands of client claims. According to the minister in the explanatory notes to the bill, verification of the claims could create a considerable administrative burden, as it would be labour intensive, costly and time consuming.
This burden is created by the procedure of verification and validation in Dutch bankruptcies. The normal course of events is that the trustee asks the supervisory judge to schedule a verification meeting as soon as the trustee establishes that the estate will contain enough proceeds for the trustee to make a (full or partial) distribution to ordinary creditors. The supervisory judge will determine a date for the verification meeting. A creditor must submit its claims with the trustee by providing a written statement putting forward its claim along with substantiating documents. The trustee verifies the individual claims submitted to it with the books and records of the bankrupt debtor. If the trustee or the other creditors dispute the claim, the claim will be referred to claim validation proceedings. The judgment in these proceedings is open to appeal and, later, to appeal in cassation.
As mentioned above, the verification of the claims in a bankruptcy such as DSB could create a considerable administrative burden. The bankruptcy process would progress slowly and the creditors might have to wait a long time for their money. In addition, in such instances the verification costs incurred by creditors can often be disproportionate to the value of their claim.
According to the minister of safety and justice, Collective Settlement of Mass Claims Act proceedings are suitable to replace the costly and time-consuming verification proceedings, as the damage scheduling approach would be followed. According to this approach, compensation would be awarded to claimants not on the basis of their individual characteristics (as in verification), but rather on the basis of characteristics of the class of which the particular individual claimant is a member. The creditors need not submit their claims under a Collective Settlement of Mass Claims Act agreement (that the trustee has concluded and that the court has declared binding) for validation in the verification proceedings. The trustee will settle the claims under the agreement by admitting them to the list of recognised creditors according to the common rules of liquidation in bankruptcy. Thus, according to the minister, it is possible to accelerate the bankruptcy process, as the trustee need only establish the class to which the individual belongs and does not have to assess the individual claim (as is currently the practice).
As Collective Settlement of Mass Claims Act proceedings replace verification, the other creditors are not entitled to dispute the claims of the creditors under a Collective Settlement of Mass Claims Act agreement once it has been declared binding; equally, the creditors under the agreement may not set up a defence against the other group's claims. In a reaction to the first draft of the bill, the Council of State wondered whether this might not be contrary to the principle of paritas creditorum - the right of all creditors to be paid from the net proceeds of the debtor's assets in proportion to their claims.
In response to this objection, the minister argued that the other creditors were entitled to challenge the validity of (all or part of) the Collective Settlement of Mass Claims Act agreement at an earlier stage, during proceedings under the act. Moreover, the advantage for the other creditors of disputing the claims in such proceedings would be that one single collective challenge would suffice, instead of possibly raising thousands of individual disputes in the verification proceedings. For this reason, according to the minister, the other creditor can set up a defence in a far more effective and efficient manner.
Without the bill, a bankruptcy trustee under Dutch law already has the possibility to conclude a Collective Settlement of Mass Claims Act agreement. On September 19 2011 the trustees in the DSB bankruptcy reported that under the current legislation, they had reached a compensation settlement with foundations representing groups of injured parties and organisations providing legal aid. In their public report of April 26 2012, the DSB trustees announced that in the course of this year they will submit a request to the Amsterdam Court of Appeal pursuant to the act to declare this settlement agreement binding.
Apart from this, several objections to the principle of the proposal are conceivable. One such objection would be that it is simplistic to argue, as the minister has done, that the advantage for the other creditors of disputing the claims in Collective Settlement of Mass Claims Act proceedings is that one single collective challenge would suffice - the administration of the members of various classes and sub-classes of creditors would still have to take place and the other creditors would still be faced with the complexities of this system. From that perspective, it is not immediately clear whether the proposed change in legislation will actually expedite the handling of bankruptcy class actions.
For further information on this topic please contact Frans van Koppen or Barbara Rumora-Scheltema at NautaDutilh by telephone (+31 10 224 0000), fax (+31 10 414 8444) or email (email@example.com or firstname.lastname@example.org).
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