PhD November 21st 2007
Mr. Arnoud Noordam gained his law doctorate on November 21st , 2007. A summary in English of the original thesis can be downloaded here. An abridged and updated version of the thesis is available (in Dutch) under ISBN-number 978-90-13-04794-3 (Kluwer Publishers, series Recht & Praktijk nr. 160).
Debt restructuring and good faith
The main subject of Mr. Noordam’s thesis is the good faith test, as applied by the Dutch courts when deciding on whether to allow a debtor admission to the Dutch Debt restructuring scheme for natural persons (in Dutch the relevant Act is referred to as the Wsnp). Extensive case law and parliamentary history concerning the Wsnp is reviewed in the thesis.
In addition research was carried out on (a) the causes of debt problems, (b) debt counseling and adjustment outside insolvency proceedings, (c) the history of Dutch insolvency law (commencing with Roman law), (d) the application of the debt restructuring scheme to sole traders, (e) the revised version of the Wsnp which will come into force in 2008, (f) a comparative study of the personal bankruptcy systems in the US, France, Germany, Belgium, Luxemburg, England and Wales and European initiatives. Mr. Noordam’s three final conclusions follow below:
1. Under the Dutch Act on Debt Restructuring (Wsnp), any over-indebted individual (whether engaged in commercial business or not) may submit a request to the bankruptcy court to apply for admission to the debt restructuring scheme. Under the current Wsnp (effective since 1998) the court may reject admission to the scheme if the court finds that it is likely that the debtor has not acted in good faith when incurring debts or leaving them unpaid. As of 2008 the debtor will be required to demonstrate that he or she has acted in good faith (with regard to incurring debts or leaving them unpaid) for a period of five years prior to his or her application for admission to the Wsnp scheme. Parliamentary history and Dutch case law give no satisfactory explanation of the meaning or the role of this good faith test.
The Supreme Court refers to the inconclusive parliamentary history and has, until 2007, not made any efforts to interpret the ratio of the good faith principle or the lower courts’ discretionary power to apply the principle. Accordingly, many variations can be identified in decisions made by the lower courts.
However, it is possible to identify certain categories of debts and circumstances which will, in the majority of cases, result in a rejection of a Wsnp application. Where debts occur as a result of (a) social security fraud, (b) criminal offences, or (c) substance addiction, the debtor is usually considered to be lacking good faith. Reasons to reject applications of individuals engaged in business are lack of good faith due to (i) the inadequacy of the administration/accounts, (ii) continued loss-making business activities, and/or (iii) the existence of tax debts.
However, even where the debtor is found to be lacking good faith the courts have, in certain cases, used their discretionary power to allow admission to the Wsnp scheme on the basis of (1) personal circumstances, such as illness or a family situation in which young children may be affected, (2) the time elapsed since the debts were incurred, or (3) a positive attitude on behalf of the debtor who is making a genuine attempt to pay off his debts.
2. Our welfare and economic growth relies on the provision of credit. Debt restructuring offers a form of social insurance for over-indebted individuals which is indispensable to a modern credit society. To be admitted to a debt restructuring scheme I believe it is necessary and sufficient that the debtor is prepared (a) to balance income and outlay and (b) to make the maximum effort to acquire an income surplus to pay off his creditors.
3. In Mr. Noordam’s opinion, the good faith test is neither in line with the historical development of Dutch insolvency law nor is it in line with the legal systems of our neighbouring countries or the US system. It is contrary to the three objectives of the Wsnp. Furthermore the ambiguous test undermines legal certainty for both insolvent debtors and their creditors and affects the equal rights and ranking of creditors. The test adversely affects the realization of consensual debt arrangements and provides no benefit to the creditors. Thus it is Mr. Noordam’s conclusion that the good faith test unnecessarily impairs debt restructuring. Consequently, the good faith test should be excised from the Dutch rules on debt restructuring.