Supreme Court provides clarity on good faith standard
The Supreme Court recently ruled (Supreme Court 25 August 2023, ECLI:NL:HR:2023:1135) that in assessing whether a party that made a set-off acted in "good faith" within the meaning of section 54 DBA and 235 DBA, it should be determined what that party actually knew but also what that party should have known with regard to the financial position of the bankrupt entity. In addition, the Supreme Court ruled that the extended exception to the limited set-off possibilities of banks (also known as the ‘Mulder q.q./CLBN exception’; see Mulder q.q./Crédit Lyonnais) in principle also applies when the payment was made into a bank account of another debtor (i.e. a party other than that of the debtor) provided the pledge on the receivable that is set-off (also) serves as security for the payment of that other debtor's debt.
Background
Flinter is a group of entities active in the shipping industry (the Flinter Group). ING provided credit to the Flinter Group. As security for repayment, ING established an undisclosed pledge on the receivables of two entities, Shipping and Chartering (both part of the Flinter Group). In addition, a 'compte joint and several liability agreement' (CJSA) was agreed, pursuant to which (in brief) each Flinter Group company that is a party thereto is jointly and severally liable to ING for the debts of each Flinter Group company to ING and ING is authorised to transfer amounts from each company on ING accounts to itself or to an ING account of another Flinter Group company that is a party to the CJSA and to settle such amounts with claims of ING against such companies.
The Flinter Group provided chartering services for, among other things, wind turbines to Vestas Wind Systems A/S (Vestas). In doing so, Shipping acted as an authorized representative by power of attorney on behalf of the owner of the vessels (i.e. Chartering). Vestas settled the invoices sent by Shipping by transferring the relevant amount into Shipping's account with ING while thus actually settling claims of Chartering.
On 19 October 2016, the Rotterdam District Court granted a provisional moratorium to (among others) Shipping. On 20 October 2016, ING transferred the credit balance of Shipping to ING accounts of other Flinter Group companies that were in overdraft and then set off those overdrafts against the credit balance. Effectively, Shipping's receivables against ING were set off against ING's receivables against other Flinter Group companies. On 15 December 2016, Shipping was declared bankrupt.
The bankruptcy trustee claims (i) a declaratory judgment that ING (a) debited the credit balance in breach of section 228 DBA because the Rotterdam District Court granted Shipping a temporary moratorium on 19 October 2016 and ING transferred Shipping's credit balance to another ING account on 20 October 2016 without the cooperation of the administrator and (b) as from 15 June 2016 was no longer acting in good faith within the meaning of section 54 DBA and section 235 DBA and was therefore not authorised to set off, and (ii) order ING to repay to the bankruptcy trustee the credit balance debited by ING from the Shipping bank account.
Against this background, three questions of law arise. In an interlocutory judgment the court listed those three legal questions and gave its own considerations. The three questions of law are (in brief):
- In the context of the set-off, did ING act in good faith in accordance with section 235 DBA, which is substantively similar to section 54 DBA?
- Does section 228 DBA prevent ING, after suspension of payments was granted to (among others) Shipping without the cooperation of the administrator, transferring the credit balance on the Shipping bank account to ING bank accounts of other Flinter Group companies that are parties to the CJSA?
- Does the extended exception to the limited set-off possibilities of banks (from Mulder q.q./Crédit Lyonnais, which exception entails that a bank is allowed to set-off - notwithstanding section 54 DBA - if it concerns a payment of a claim which claim has been pledged to that bank on an undisclosed basis) also applies if the pledged claim is paid into a bank account which is not in the name of the pledgor (i.e. Chartering's account), but of a jointly and severally liable sister company (i.e. Shipping's account) that has also pledged its claims to the bank?
In order to answer these questions of law, the court and the parties turned to the Supreme Court.
Supreme Court
The Supreme Court addresses the questions raised step by step.
Question 1: Good faith within the meaning of section 54(1) DBA
The Supreme Court stated that the question whether the actual knowledge (subjective knowledge) or also the knowledge that a party should have had (objective knowledge) should be considered in determining whether a party acted in 'good faith' within the meaning of sections 54 and 235 DBA, has not been answered before. With reference to section 3:11 of the Dutch Civil Code (DCC) (which provides that a successful reliance on good faith requires an assessment of both objective and subjective knowledge) and section 3:15 DCC (which provides that sections 3:11up to and including 3:14 DCC do not apply outside the scope of application of property law only insofar the nature of the legal relationship prohibits such application), the Supreme Court concludes that the good faith criterion of section 3:11 DCC can be followed. In other words, in assessing whether a party that made a set-off acted in "good faith" within the meaning of section in art. 54 DBA and 235 DBA, it should be determined what that party actually knew but also what that party should have known with regard to the financial position of the bankrupt entity.
The Supreme Court further considers that all the circumstances of the case must be considered. The Supreme Court then discusses circumstances that may be relevant in that regard. It stated that, in general, it can be assumed that a bank which has valid reasons to believe that a rescue attempt (in case of continued or additional financing) has an actual chance of succeeding, does not know and should not have known that the debtor is in such a condition that its bankruptcy or suspension of payments can be expected. However, the mere willingness to (continue the) financing or cooperation in a rescue attempt is insufficient to demonstrate good faith. Hence, a bank does not necessarily act in good faith solely because it is (still) willing to provide continued or additional financing.
Question 2: Cross-settlement and article 228 BA
The Supreme Court ruled that the opinion of the court was not incomprehensible, in the sense that ING exercised its own power of set-off by transferring Shipping's credit balance to an ING account with a debit balance and setting it off against that balance. Section 228 DBA does not prohibit such an act, as that article relates to acts of management and disposal by/on behalf of the debtor. The fact that ING invoked joint and several liability in its letter of 14 February 2018 does not require the court to rule differently.
Question 3: Scope Mulder q.q./Crédit Lyonnais
In Mulder q.q./Crédit Lyonnais, the case involved payment of a claim of a debtor of the bank that was undisclosed pledged to that bank into the debtor's account with that bank. In that case, the Supreme Court ruled that section 54 DBA does not prevent the bank from setting off its debt to the debtor as a result of such payment against its claim against that debtor. The Supreme Court held that this possibility also applies when (as in this case) a claim that is subject to an undisclosed pledge (Chartering's claim against Vestas) is paid into the bank account of a different debtor of the bank (Shipping) than the debtor that pledged that claim (Chartering) provided the pledge (the pledge on Chartering's claim on Vestas) (also) serves as security for the payment of that other debtor's debt (Shipping's debt to ING).
Conclusion
With this judgment, the Supreme Court clarifies the interpretation of the good faith standard and the scope of the expanded exception to the limited set-off possibilities of banks. It follows from the Supreme Court's ruling that in respect of the good faith standard under sections 54 and 235 DBA both subjective and objective knowledge should be considered.
The judgment also shows that the expanded exception to the limited set-off possibilities of banks also applies if the payment of the pledged claim was made to a bank account other than that of the pledgor provided the pledge on the claim (also) serves as security for the payment of that other debtor's debt to the bank.
Should you require assistance or advice on similar issues, please feel free to contact the experts at Meijburg Legal.
