'Shadow administration' developed by courts now becomes draft legislation

Date 06-11-2013

Over the past year, following the needs felt by both insolvency practitioners and judges, informal guidelines have been developed by a number of courts to lengthen the period of pre-insolvency involvement and to expand the role of the prospective trustee. Dutch insolvency law does not provide a legal basis for the appointment of a trustee prior to the opening of formal insolvency proceedings. But the practice of 'shadow administration' enables the future trustee to mitigate his or her information disadvantage and keep up with negotiations between the company and prospective buyers and, ultimately, to prepare a plan for controlled insolvency together with important stakeholders. In addition, viable out-of-insolvency restructuring scenarios can be examined, in which case insolvency proceedings will not follow. The experiences with this relatively new practice are generally positive among courts as well as academics and insolvency practitioners. The absence of a formal legal basis, however, has been a source of uncertainty.

The Minister of Justice has now prepared draft legislation to provide a legal basis for the shadow administration and the use of a prospective trustee. The prospective trustee may, upon the request of the company in financial difficulties, be allocated by the court to the company on a voluntary basis if this is deemed to be in the public interest or in the interest of the company's joint creditors. The court proceedings are conducted behind closed doors and the decision will remain confidential. The prospective trustee will have no authority to represent the company and may not make himself known to the outside world without the consent of the management. Even so, the prospective trustee is orientated towards the interests of the company's joint creditors and the public interest of saving jobs. If continuity is realistic, the prospective trustee's efforts will be aimed at working out a restructuring plan. The prospective trusteeship is not necessarily the gate of insolvency, but is also a measure to bolster the company's restructuring potential. Furthermore, the company can ensure, for the benefit of all parties, that transactions they make in this phase will not be annulled later in a formal bankruptcy by the trustee on the ground that the transaction is prejudicial to the company's joint creditors.

The draft legislation now enters a phase of consultations and is expected to be placed before Parliament prior to summer of 2014. The legislation comes at the right time in the Netherlands as it is likely to boost the number of out-of-court restructurings and allow for pre-packaged insolvencies.