22.01  Under Dutch law, as in many other jurisdictions, set-off is one of the methods of discharging claims. In a situation where a debtor has a cross-claim against a creditor, set-off is the right of a debtor to discharge his claim by reducing or extinguishing his creditor’s claim by the amount of his cross-claim. The right of set-off is important in most financial transactions as it can often achieve the same result as a security interest¹—reduction of the risk of non-payment and reduction of the risk of bankruptcy—but without the complications that may arise in connection with creation, perfection, and enforcement. Of course, the concept of set-off does come with some complications of its own.

22.02  No special regime exists in the Netherlands for set-off clauses in finance documentation. The general rules relating to set-off are applicable to these clauses. The actual Dutch provisions which apply will depend on whether or not the right to set-off is exercised within the context of insolvency. Outside insolvency, (p. 326) the provisions of the Dutch Civil Code (Burgerlijk Wetboek) apply. As in many other jurisdictions, different rules become applicable in the Netherlands when the party against whom set-off is sought enters into insolvency.² Typically, it is in these circumstances that a creditor is most dependent on the effectiveness of his right of set-off. In financial transactions it is therefore often crucial to obtain certainty as to whether the right of set-off survives the other party becoming insolvent. Within the context of bankruptcy, the provisions of the Dutch Bankruptcy Code (Faillissementswet) are relevant. Special rules with respect to set-off apply when a credit institution, a large investment firm, or an insurance company is subjected to crisis prevention measures or crisis management measures by the competent supervisory or resolution authorities and set-off is sought against such entity. Within this context, the provisions of the EU Bank Recovery and Resolution Directive and the Dutch Act on Financial Supervision (Wet op het financieel toezicht) come into play.

22.03  According to the Dutch Civil Code, the right of set-off outside insolvency proceedings is available to a debtor if the following conditions are met:³

1. (1)  Mutuality: the mutual debts must be between the same parties, acting in the same capacity. Set-off is not possible if the claim and debt form part of different estates.

2. (2)  Corresponding claims: both claims must relate to the same subject matter. Corresponding claims are, for example, two monetary obligations payable in the same currency or two obligations for the delivery of securities of the same kind. Cross-claims payable in different currencies may not be set off against each other. The effect of this rule may be somewhat mitigated by the general rule under Dutch law that if a claim is denominated in a currency other than the currency of the country where the payment must be made, the debtor may also pay in the currency of such country, unless the parties have agreed otherwise or unless this conflicts with legislation or customs.

3. (p. 327) (3)  Authorization to discharge debt: the debtor must be authorized to discharge his debt. A debtor shall, for instance, not be authorized to discharge his debt if the debt has not yet become due and payable and prepayment is not possible.

4. (4)  Due and payable claim: the claim of the creditor must be due and payable.

22.04  There is one important exception to the requirement of mutuality. This exception applies if one of the claims has been assigned to a third party. A debtor may invoke set-off against the assignee if his claim against the assignor has become due and payable before the assignment, or if the debtor’s claim against the assignor arises from the same legal relationship as the assignee’s claim against the debtor.⁴ An example of the latter is where the assignor assigns a claim against the debtor for the payment of a purchase price and the debtor, when the assignee demands payment of such claim, answers by invoking the set-off of a claim for damages for breach of contract against the assignor. The same rule applies if a claim has become subject to a disclosed right of pledge, pursuant to which the debtor may only discharge his claim by paying to the pledgee.

22.05  Unless otherwise agreed between the parties, set-off does not occur by operation of law, but must be invoked by one of the parties. This is done by sending a statement of set-off to the other party. There are no specific requirements as regards the contents and form of such statement.

22.06  When set-off is invoked, it has retroactive effect as from the moment that the right to set-off became available. However, if interest has been paid in respect of one or more of the debts involved, the retroactive effect will only extend to the end of the term of the last interest payment made. If exchange rates must be applied in order to effectuate set-off, these exchange rates will always be the exchange rates of the date on which set-off is invoked.⁵

22.07  The statutory right of set-off described above may be modified by agreement between the debtor and the creditor. Parties to a contract may agree to widen the right of set-off beyond its statutory limits by contractually eliminating one or more of the requirements set out above, as, for instance, is seen in the general terms and conditions applied by most banks in the Netherlands. Although there is some doubt as to whether a contractual set-off provision without mutuality is enforceable, it is likely that, outside bankruptcy, this is the case. In addition, parties may also contractually restrict or exclude the statutory right of set-off. (p. 328) Outside bankruptcy, a contractual modification of the statutory right of set-off will have effect against third parties, such as attachors or pledgees.⁶

22.08  In a bank account, debits and credits are generally set off against each other automatically at the moment the relevant book entries are made and in the order in which the respective book entries are made, so that only the balance in the bank account results at any time. The entry of a claim or debt in a current account does not result in the novation of such claim or debt. The claim or debt retains its original identity and the rights and remedies attached to such claim or debt will remain intact until the claim or debt has been extinguished through set-off.⁷

22.09  As in many other jurisdictions, different rules become applicable in the Netherlands when the party against whom set-off is sought enters into insolvency. At this point, the provisions of the Dutch Bankruptcy Code apply. Pursuant to the Bankruptcy Code, with certain exceptions, the debtor of a bankrupt party is entitled to set off his claim if (i) both cross-claims have come into existence prior to the effective date of the bankruptcy, or (ii) both cross-claims result from transactions with the bankrupt party which were concluded prior to the effective date of the bankruptcy.⁸ In this respect, it is important to note that a bankruptcy order has retroactive effect until midnight on the day on which the court order is rendered—the zero-hours regime.⁹

22.10  Essentially, this means that the right of set-off against a bankrupt party is broader than the statutory right of set-off outside bankruptcy. Neither the requirement that the party invoking set-off is authorized to discharge his debt nor the requirement that the claim of the counterparty must be due and payable have to be met. Even future claims may be set off against each other for their respective value on the effective date of the bankruptcy. It is generally assumed, however, that the first two requirements for the statutory right of set-off outside bankruptcy proceedings—mutuality and corresponding claims—will still have to be fulfilled with respect to set-off against a bankrupt party.

22.11  Crucially, there is the question whether the rules of insolvency set-off, as set out above, can be varied by contract. The Dutch Bankruptcy Code does not contain a provision on this point. There is also no published case law available on the question whether a contractual set-off can be validly invoked against a bankruptcy trustee in insolvency proceedings. Nevertheless, it is generally accepted that contractual set-off provisions will be effective if, and to the extent that, the effect will remain within the parameters established by the set-off provisions of the Dutch Bankruptcy Code. A more extensive application of the right of set-off may not be enforceable. While it is likely that a contractual set-off providing for tripartite set-off without mutuality is enforceable outside bankruptcy, it is doubtful whether the same is true in the event of a bankruptcy. In order for the set-off provisions in, for instance, a multi-entity cash-pooling agreement to be effective in the event of a bankruptcy, it is therefore necessary to contractually create mutuality by including a joint and several liability provision or a payment guarantee.

22.12  As set out above, there is one important restriction on the right of set-off in bankruptcy: both cross-claims must have come into existence prior to the effective date of the bankruptcy, or both cross-claims must have resulted from transactions with the bankrupt party which were concluded prior to the effective date of the bankruptcy. The answer to the question whether a claim comes into existence prior to or after the effective date of a bankruptcy is usually straightforward. However, the question whether a claim results from a transaction with the bankrupt party which was concluded prior to the effective date of the bankruptcy has been the subject of much case law. Many cases have focused on insolvency set-off in connection with bank accounts. In the so-called ‘Postgiro-decision’, the Dutch Supreme Court (Hoge Raad) held that amounts paid into a bank account during the bankruptcy of the account holder cannot be set off by the bank against claims owed to the bank by the account holder.¹⁰ In that case, the bank argued that its obligation to pay to the bankrupt party the amount credited to the bank account—although not existing at the date of bankruptcy—resulted from the account agreement, which did exist on the date of bankruptcy. The Supreme Court did not agree with this analysis and elaborated on its decision by stating that set-off is not possible where the direct source of the claim lies in an act of a third party that was performed after the date of bankruptcy, such as the instruction of a third party to pay an amount into the account. It ruled that in these circumstances the third-party act was not related to the prior agreement between the bankrupt party and the bank.

(p. 330) 22.13  The effects of the Postgiro-decision have been somewhat mitigated by another decision of the Supreme Court. In a landmark decision in 1995 the Supreme Court held that the bank may set off an amount paid into the bank account after the bankruptcy of the account holder, if the amount paid into the bank account was the discharge of a claim that had been pledged to the bank as security for the debts of the account holder.¹¹ The rationale behind this decision was that, in such a situation, the claim owed by the third party to the account holder that was being discharged by the payment into the account was already subject to a preferential right of the bank. Thus the payment should accrue to the benefit of the bank.

22.14  One important restriction to the statutory right of set-off in bankruptcy described above occurs where the party seeking set-off acquires claims or debt prior to, or after, bankruptcy of the party against whom set-off is sought. The Bankruptcy Code provides that set-off is not allowed with respect to (i) claims owed to or by the bankrupt party that were acquired after the bankruptcy, and (ii) claims owed to or by the bankrupt party that were acquired prior to the bankruptcy, if the party seeking set-off was acting in bad faith when acquiring the claim.¹² A party is considered to act in bad faith if he knows that his counterparty is in such financial difficulties that a bankruptcy is to be expected.¹³

22.15  The above restriction has led to several decisions of the Supreme Court, particularly in the context of bank accounts. The Supreme Court has held that a bank cannot set off an amount credited to a client’s bank account against amounts owed by the client if the bank knows that a petition for the client’s bankruptcy has been filed,¹⁴ or that a bankruptcy is to be expected.¹⁵ The rationale behind these decisions was that the bank makes itself a debtor of the bankrupt by crediting the bank account after another debtor of the bankrupt has paid into it. In the 1995 landmark decision referred to above, the Supreme Court held that the bank may set off an amount paid into the bank account after the bankruptcy of the account holder—even if the bank did act in bad faith—if the amount paid into the bank account was for the discharge of a claim that had been pledged to the bank as security for the debts of the account holder.¹⁶

22.16  The Bankruptcy Code provides for a stay against realization of the bankrupt party’s assets.¹⁷ At the request of the bankrupt party or the trustee in bankruptcy, a court may restrain third parties from seizing, without authorization, assets belonging to the bankrupt’s estate during a period of up to four months. This is commonly referred to as the ‘cooling-off period’. According to the legislature, the purpose of the freeze is the following:¹⁸

Especially during the period immediately following the adjudication of bankruptcy, the trustee in bankruptcy needs time to form an opinion regarding the question as to which goods comprise the bankrupt estate, or which goods he, in any event, wants to maintain for the estate, for example in connection with a possible continuation or sale of the business. The strategy of the trustee in bankruptcy can be severely frustrated if he, during that period, is presented with a ‘fait accompli’ by the third parties. That is why there is a need for the ability to subject third parties to a cooling-off period, during which third parties cannot exercise their rights without permission from the supervisory judge in bankruptcy. In this way [the cooling-off period] prevents—as is currently the situation—third parties from removing goods from the bankrupt estate immediately after a bankruptcy is adjudicated to prevent other parties—such as the tax authorities—from exercising their rights over those goods.

22.17  It is unclear whether a cooling-off period in bankruptcy will also affect the exercise of the right of set-off. There is no case law on this question. In view of the above reasoning, it is unlikely that the exercise of the right of set-off will be affected. However, in the unlikely event that the right of set-off is affected, it may be delayed for a maximum period of four months. Recourse by way of set-off against assets that have been pledged pursuant to a financial collateral arrangement is explicitly exempted from a cooling-off period and is therefore unaffected.¹⁹

22.18  Under specified circumstances, Dutch law entitles the trustee in bankruptcy to avoid legal acts—such as set-off—which are to the detriment of the means of recourse of other creditors. This is the ‘actio pauliana’. This appears to be broadly similar to the concept of fraudulent preference or fraudulent conveyance found within certain common law jurisdictions.

(p. 332) 22.19  The first provision regarding the actio pauliana is only applicable if the debtor has performed a legal act without having a prior contractual or statutory obligation to do so. A trustee in bankruptcy can only annul a non-obligatory legal act for value, if both contracting parties knew, or should have known, at the time they entered into the legal act, that the legal act would be detrimental to the other creditors.²⁰ It is insufficient if it is only a possibility that the interests of the creditors will be prejudicially affected. It is a requirement that both the party who is eventually to become bankrupt and his counterparty knew, or should have known, that it was almost inevitable that the other creditors would indeed receive less as a result of the legal act.

22.20  Both parties are presumed to have had knowledge of the fact that the contract would prejudice the other creditors if the legal act in question was entered into within one year prior to the declaration of bankruptcy and, in addition thereto, amongst other things, (i) the value of the obligation on the bankrupt party’s side considerably exceeds the value on the other party’s side, or (ii) a debt is paid or security is provided for a debt that was, at such time, not yet due and payable.²¹ If these conditions are met, this presumption of knowledge may be overcome by the creditor demonstrating a lack of such knowledge.

22.21  The second provision regarding the actio pauliana relates to legal acts that are performed by a party that is under a statutory or contractual obligation to do so. These acts can only be annulled by a trustee in bankruptcy if (i) the counterparty knew that the petition for bankruptcy of the debtor was pending at the moment of performance, or (ii) the counterparty and the bankrupt party conspired to intentionally grant the counterparty a benefit over all other creditors.²² Knowledge of the fact that other creditors are being prejudiced is not sufficient.²³ The Dutch Supreme Court has decided that a conspiracy between the bankrupt party and the counterparty is required. Both parties must have had the intention to prejudice the position of the other creditors.²⁴

22.22  Specific provisions aimed at the protection of close-out netting provisions in a financial collateral arrangement are laid down in the EU Collateral Directive.²⁵ This EU directive was implemented in the Netherlands by adding a new chapter to Book 7 of the Dutch Civil Code. In addition thereto, certain provisions in other (p. 333) laws, such as the Bankruptcy Code and the Dutch Act on Financial Supervision, have been amended with respect to financial collateral arrangements.

22.23  The Collateral Directive provides that close-out netting provisions shall be effective notwithstanding the commencement or continuation of winding-up proceedings or reorganization measures in respect of the collateral provider and/or the collateral taker.²⁶ Close-out netting provisions are defined in the Collateral Directive as provisions by which, on the occurrence of an enforcement event, whether through the operation of netting or set-off or otherwise, (i) the obligations of the parties are accelerated so as to be immediately due and expressed as an obligation to pay an amount representing the estimated current value, or are terminated and replaced by an obligation to pay such an amount, and/or (ii) an account is taken of what is due from each party to the other in respect of such obligations, and a net sum equal to the balance of the account is payable by the party from whom the larger amount is due to the other party. The requirements and effects of a financial collateral arrangement are governed by the provisions of the legislation implementing the Collateral Directive. However, with respect to subjects that are not being dealt with by this legislation, the ‘regular’ provisions of Dutch law apply to a financial collateral arrangement. The Minister of Justice has indicated that, in his view, the Dutch provisions on set-off did not require any amendment in order to meet this objective of the Collateral Directive. Therefore, the regular set-off provisions as set out in the Civil Code and the Bankruptcy Code apply to financial collateral arrangements and must be deemed to provide for this. As Dutch courts are under a general duty to interpret the relevant provisions of Dutch law in accordance with the relevant EU directives, we would expect the Dutch courts to interpret the relevant provisions of Dutch law in accordance with Article 7(1)(a) of the Collateral Directive.

22.24  The Collateral Directive did, however, give rise to the amendment of other provisions of Dutch law that are relevant in connection with the right of set-off. First, the provision in the Bankruptcy Code that a bankruptcy order has retroactive effect until midnight on the day on which the court order is rendered is disapplied with respect to financial collateral arrangements. In addition thereto, it is provided that any legal act performed pursuant to a financial collateral arrangement—such as set-off—on the day of the commencement of bankruptcy proceedings, but after the moment of the order making that commencement, shall be legally enforceable and binding towards third parties if the collateral taker can prove that he was not aware, nor should have been aware, of the commencement of bankruptcy proceedings.²⁷ In these circumstances, the regular insolvency (p. 334) set-off provisions, as set out above, are disapplied. This does not apply, however, to the rules relating to the actio pauliana and to the provision that set-off is not allowed with respect to claims owed to or by the bankrupt party that were acquired prior to the bankruptcy, if the party seeking set-off was acting in bad faith when acquiring the claim.

22.25  Special provisions also apply with respect to the exercise of set-off rights arising under a financial collateral arrangement. First of all, the bankruptcy cooling-off period does not apply to recourse by way of set-off against assets that have been pledged pursuant to a financial collateral arrangement.²⁸ Furthermore, the exercise of set-off rights arising under a financial collateral arrangement with an insurance company that is subjected to an intervention measure by the Dutch Central Bank or the Minister of Finance under the national intervention regime with respect to insurance companies, as set forth in the Dutch Act on Financial Supervision, is exempted from the provision that in such a situation contractual counterparty rights may only be exercised with the consent of the Dutch Central Bank.²⁹

22.26  The EU Bank Recovery and Resolution Directive (BRRD),³⁰ as implemented in the Dutch Act on Financial Supervision, and the EU Single Resolution Mechanism Regulation (SRMR),³¹ provide for a European-based legislative framework with respect to the recovery and resolution of credit institutions and large investment firms that is applicable in the Netherlands. This legislative framework grants the competent supervisory and resolution authorities the power to subject credit institutions and large investment firms that are experiencing serious financial problems to certain crisis prevention measures and certain crisis (p. 335) management measures. Crisis prevention measures include the appointment of a curator or a temporary administrator and the write-down or conversion of certain capital instruments. Crisis management measures include the application of certain resolution tools, such as the sale-of-business tool, the bridge-institution tool, the asset-separation tool and the bail-in tool. To support the application of those measures, the legislative framework provides for restrictions on the exercise of contractual counterparty rights—such as a right of set-off—in the event of early intervention or resolution. On the other hand it also provides for safeguards so as to ensure that contractual counterparty rights as such are not affected by such measures.

22.27  The Dutch Act on Financial Supervision also provides for a national intervention regime. This national intervention regime includes powers for the Dutch Central Bank to procure the transfer to a third party, in whole or in part, of an insurance company which is experiencing serious financial problems, either by way of a transfer of assets and/or liabilities or by way of a transfer of shares in the relevant institution. It also gives the Minister of Finance extensive powers to intervene in the affairs of banks, insurance companies, and other financial undertakings, if this is necessary to safeguard the stability of the financial system. These powers include (i) the power to expropriate securities issued by such financial undertakings, or with their cooperation, claims against such undertakings, or some or all of their assets and/or liabilities, and (ii) the power to take immediate measures, which measures may deviate from statutory provisions and may entail a prohibition on the entering into or performing certain transactions. In order to increase the efficacy of these special measures, the national intervention regime contains provisions restricting the contractual rights of counterparties—such as a right of set-off—of an insurance company that is or has been subject to one of these special measures. On the other hand it also provides for safeguards so as to ensure that contractual counterparty rights as such are not affected by such measures.³²

22.28  Pursuant to the BRRD regime, as such regime is implemented in the Dutch Act on Financial Supervision, a crisis prevention measure or a crisis management measure—such as the appointment of a curator or a temporary administrator, the write-down or conversion of certain capital instruments or the application of a resolution tool—or the occurrence of any event directly linked to the application (p. 336) of such measure, in respect of a bank or a large investment firm, is, with regard to the contract to which such entity is a party, not a ground for the counterparty to exercise its contractual set-off rights, provided that such bank or investment firm continues to perform its substantive obligations under the contract.³³ The same applies mutatis mutandis in the event of an expropriation measure by the Minister of Finance with respect to a bank or an insurance company on the basis of the national intervention regime.³⁴

22.29  Pursuant to the BRRD regime, as such regime is implemented in the Dutch Act on Financial Supervision, the Dutch Central Bank has the power to prevent a counterparty of a bank or large investment firm under resolution from exercising its contractual set-off rights until 00.00 hours Dutch time at the end of the business day following the day of publication of the relevant decision.³⁵ If an insurance company is subject to an intervention measure on the basis of the national intervention regime, the national intervention regime provides that the counterparty of the insurance company may only exercise its contractual set-off rights with the consent of the Dutch Central Bank.³⁶ However, an exception to this restriction applies for the exercise of set-off rights arising under a financial collateral arrangement with the relevant insurance company.³⁷

22.30  Pursuant to the BRRD regime, as such regime is implemented in the Dutch Act on Financial Supervision, rights under (among others) a netting or set-off arrangement with a bank or large investment firm in resolution are not affected as a result of a mandatory transfer of some but not all of the assets and liabilities of such bank or investment firm.³⁸ It is explicitly prohibited for the Dutch Central Bank as national resolution authority to transfer in part assets and liabilities that are governed by such a netting or set-off arrangement.³⁹ Pursuant to the national intervention regime, a similar protection is granted to rights under a netting or set-off arrangement with respect to financial instruments with an insurance company that is subject to a transfer measure concerning its assets and/or liabilities.⁴⁰ The same applies in the event of an expropriation by the Minister of Finance of the assets and/or liabilities of a bank or an insurance company or another financial undertaking.⁴¹ The protection offered by the BRRD regime, as such regime (p. 337) is implemented in the Dutch Act on Financial Supervision, is broader than the protection offered under the national intervention regime because it is not limited to netting and set-off arrangements in agreements with respect to financial instruments, but also extends to rights to set-off arising under other agreements such as agreements with respect to deposits or credits.

22.31  The above applies to rights of set-off governed by Dutch law. If one of the parties to the obligations that may be set off is domiciled in another jurisdiction than the Netherlands, laws of other jurisdictions may come into play. A Dutch court will determine the law applicable to set-off in accordance with Dutch private international law. Dutch private international law concerning set-off is laid down in EU regulations, EU directives, national statutory provisions and case law. EU regulations are directly applicable in the Netherlands, whereas EU directives have to be transposed into Dutch law first.

22.32  Outside insolvency, the Rome I Regulation⁴² determines the law applicable to set-off. Pursuant to Article 17 of the Rome I Regulation, where the right to set-off is not agreed by the parties, set-off shall be governed by the law applicable to the claim against which the right to set-off is asserted. This law governs both the requirements for set-off and the legal consequences of set-off. The provision is based on a first-come–first-served principle: the party who is first to demand payment from its counterparty effectively determines which law will be applicable to the set-off. The law governing the claim or debt will determine whether such claim or debt is capable of being set off.

22.33  Outside insolvency, contractual set-off will be governed by the law applicable to the agreement of which the set-off clause forms part. As a general rule, Dutch private international law acknowledges the freedom of the parties to choose the law which should govern a contract. The choice of a law other than Dutch law will be recognized by a Dutch court following the rules laid down in the Rome I Regulation, taking into account the exceptions and limitations set forth therein.⁴³ Given that a current account will always be based on an agreement, this rule will also apply to current-account set-off.

22.34  Where set-off in insolvency situations is concerned, a distinction should be made between (a) insolvency proceedings outside the scope of the EU Recast Insolvency Regulation,⁴⁴ the EU Credit Institutions Reorganization and Winding-up Directive⁴⁵ and Solvency II,⁴⁶ and the provisions of Dutch law implementing these directives, and (b) insolvency proceedings within the scope of the Insolvency Regulation and those directives.

22.35  Pursuant to basic rules of Dutch private international law, a Dutch insolvency that is outside the scope of the Recast Insolvency Regulation, the Credit Institutions Reorganization and Winding-up Directive and Solvency II, and the provisions of Dutch law implementing these directives has a universal scope and the legal effects thereof will be determined by Dutch law, both within and outside the Netherlands.⁴⁷ This entails that Dutch law as the law of the opening of the insolvency proceedings determines the conditions under which set-offs may be invoked, irrespective of the law applicable to the set-off arrangement or the claims or debts involved. In principle, pursuant to basic rules of Dutch private international law, foreign insolvency proceedings have no legal effect in the Netherlands.⁴⁸ However, case law of the Dutch Supreme Court shows that the legal effects of insolvency proceedings in other jurisdictions, which are not contrary to the territorial principle under Dutch law, may be invoked in the Netherlands.⁴⁹ In addition, the trustee in a foreign insolvency proceeding may, in principle, manage and dispose of the insolvent party’s assets in the Netherlands if certain conditions are met.⁵⁰ No conclusive case law is available with respect to the issue whether foreign insolvency law provisions regarding set-off or netting will be given effect in the Netherlands.

22.36  The EU Recast Insolvency Regulation was adopted on 20 May 2015. It entered into force on 26 June 2015 and has become applicable as from 26 June 2017.⁵¹ (p. 339) The EU Recast Insolvency Regulation contains, in part, rules of conflicts of laws with respect to set-off in insolvency proceedings in the European Union. The EU Recast Insolvency Regulation is directly applicable in the Netherlands and the other Member States of the European Union (except Denmark). The EU Recast Insolvency Regulation applies to

public collective proceedings, including interim proceedings, which are based on laws relating to insolvency and in which, for the purpose of rescue, adjustment of debt, reorganisation or liquidation: (a) a debtor is totally or partially divested of its assets and an insolvency practitioner is appointed; (b) the assets and affairs of a debtor are subject to control or supervision by a court; or (c) a temporary stay of individual enforcement proceedings is granted by a court or by operation of law, in order to allow for negotiations between the debtor and its creditors, provided that the proceedings in which the stay is granted provide for suitable measures to protect the general body of creditors, and, where no agreement is reached, are preliminary to one of the proceedings referred to in point (a) or (b).⁵²

Annex A of the Recast Insolvency Regulation lists the insolvency proceedings to which it applies in each Member State. In respect of the Netherlands, the Recast Insolvency Regulation applies to bankruptcy, suspension of payments, and debt restructuring arrangements for individuals (schuldsaneringsregeling natuurlijke personen).⁵³ Certain types of entity are specifically excluded from the operation of the Recast Insolvency Regulation. The regulation does not apply to insolvency proceedings concerning credit institutions, insurance companies (which explains why the emergency regimes for credit institutions and insurance companies are not listed in Annex A of the regulation), investment firms, and other firms, institutions, and undertakings to the extent that they are covered by the EU Credit Institutions Reorganization and Winding-Up Directive (cf. Article 117 BRRD) and collective investment undertakings.⁵⁴

22.37  Pursuant to the EU Recast Insolvency Regulation, the law of the Member State of the opening of the insolvency proceedings determines the conditions under which set-offs may be invoked.⁵⁵ However, the Recast Insolvency Regulation also provides that insolvency proceedings shall not affect the rights of creditors to set off their claims against the claims of their debtors, if set-off is permitted by the laws applicable to the insolvent debtor’s claim.⁵⁶ This is generally understood to mean that, if set-off is permitted in the EU Member State in which the relevant insolvency proceeding is opened, a creditor’s right to set-off should not be affected. If, however, set-off is not permitted in that Member State, set-off may nevertheless be permitted if the laws applicable to the claim where the insolvent (p. 340) debtor is the creditor in relation to the other party provide for the possibility of set-off. According to the Recast Insolvency Regulation, this shall not preclude any actions for voidness, voidability, or unenforceability of acts that are detrimental to all the creditors under the law applicable to the insolvency proceedings.⁵⁷

22.38  There has been some debate in Dutch legal literature as to whether the laws applicable to the claim where the insolvent debtor is the creditor in relation to the other party include the laws relating to set-off in bankruptcy. As yet, there is no case law available on this question. It is also subject to discussion as to whether the rule described above applies if the law applicable to the insolvent debtor’s claim is the law of a non-EU Member State, for instance the laws of the State of New York. In legal literature, it has been argued that (the predecessor of) the relevant article only applies if the law applicable to the insolvent debtor’s claim is the law of another EU Member State. This would result from the fact that the Recast Insolvency Regulation’s scope is limited to the cross-border effects of insolvency proceedings in those Member States. It should be noted, however, that unlike other articles of the Recast Insolvency Regulation, the relevant article does not explicitly refer to the laws of another Member State.

22.39  The EU Recast Insolvency Regulation does not apply to insolvency proceedings with respect to credit institutions. However, pursuant to the Dutch Act on Financial Supervision and the Bankruptcy Code, rules similar to the rules stated in the Recast Insolvency Regulation are applicable with respect to set-off in insolvency proceedings in respect of credit institutions. These rules are the result of the implementation in Dutch law of the EU Directive on the Reorganization and Winding-Up of Credit Institutions.⁵⁸ Pursuant to these rules, the law of the EEA Member State of the opening of the insolvency proceedings shall determine the conditions under which set-offs may be invoked. Such insolvency proceedings shall not affect the right of a person that is both a creditor and a debtor of a credit institution to demand the set-off of his or her claims against the claim of the credit institution, if set-off is permitted by the law applicable to the credit institution’s claim.⁵⁹ As is the case under the Recast Insolvency Regulation, it is unclear whether the laws applicable to the credit institution’s claim include the laws relating to set-off in insolvency situations. It is also subject to discussion whether these set-off rules apply if the law applicable to the credit institution’s claim is the law of a state that is not an EEA Member State.

22.40  With respect to insolvency proceedings in respect of credit institutions, a different rule applies to netting agreements. Pursuant to the legislation implementing (p. 341) the EU Directive on the Reorganization and Winding-up of Credit Institutions, the effects of an insolvency proceeding on netting agreements shall be governed solely by the law of the contract which governs such agreement.⁶⁰ Most netting agreements within the meaning of the directive are likely also to constitute set-off or, where netting differs from set-off, to have more or less the same consequences. Although the directive and the implementation provisions do not provide much guidance in this respect, in our view this rule on netting agreements therefore effectively constitutes a lex specialis of the general rule on insolvency set-off with respect to a credit institution set out above. If this line of thought is correct—which we believe to be the case, although we cannot be certain—this means that, in the event of the insolvency of a credit institution, set-off against such credit institution based on a contractual set-off agreement will be governed solely by the law applicable to such agreement.

22.41  The EU Recast Insolvency Regulation also does not apply to insolvency proceedings with respect to insurance companies. However, pursuant to the Dutch Act on Financial Supervision and the Bankruptcy Code, rules similar to those stated in the Insolvency Regulation are applicable with respect to set-off in insolvency proceedings in respect of insurance companies. These rules stem from the implementation into Dutch law of Solvency II and its predecessor, the EU Directive on the Reorganization and Winding-up of Insurance Undertakings.⁶¹ Although these directives and the Credit Institutions Reorganization and Winding-up Directive (and the corresponding provisions of Dutch law) are based on the same principles and many of their provisions are virtually identical, there are also some important differences. In relation to set-off, it is relevant to note that, where the Credit Institutions Reorganization and Winding-up Directive contains a special rule of private international law in respect of netting agreements, no such rule is provided for in Solvency II (or the Insurance Undertakings Reorganization and Winding-up Directive), nor in the Act on Financial Supervision or in the Bankruptcy Code in connection with the insolvency of insurance companies. The absence of special rules regarding netting agreements implies that the relevant private international law rules with respect to set-off in the insolvency of an insurance company resemble to a large extent the regime of the Recast Insolvency Regulation.

22.42  Where set-off in recovery and resolution is concerned, it can be useful to make a distinction between (a) crisis prevention measures and crisis management measures with respect to a credit institution or a large investment firm based on the BRRD, as implemented in the Dutch Act on Financial Supervision, and the SRMR, and (b) intervention measures with respect to a credit institution or an insurance company based on the Dutch national intervention regime, which measures are also to be found in the Act on Financial Supervision.

22.43  Pursuant to the BRRD regime, as implemented in the Dutch Act on Financial Supervision, resolution measures taken by the competent resolution authorities in accordance with the BRRD regime, as implemented in the Dutch Act on Financial Supervision, with respect to a credit institution or a large investment firm having its seat in the Netherlands, are applicable to such institution, irrespective of the law applicable to its assets and liabilities, the financial instruments issued by it or with its cooperation, or the agreements entered into by it.⁶² The Act on Financial Supervision also provides that the provisions on the exercise of contractual counterparty rights following a crisis prevention measure or a crisis management measure are overriding mandatory provisions within the meaning of the Rome I Regulation.⁶³ This means that a Dutch court must apply these rules, irrespective of the law applicable to agreements with the institution under resolution. It entails that a Dutch court will only permit set-off against a credit institution or a large investment firm that is in recovery or resolution in accordance with the (foreign) law applicable to such set-off if such set-off is within the parameters of the BRRD regime as implemented in the Act on Financial Supervision. Since this legislation is EU-based, we would expect the court of another Member State to rule in the same way if it has to decide on the effects on set-off in its jurisdiction of a recovery or resolution measure taken by the competent Dutch authorities. Similarly, a Dutch court should recognize crisis prevention measures or crisis management measures taken by the competent authorities of another EU Member State with respect to a credit institution or large investment firm having its seat in that Member State, and only permit set-off in accordance with the (foreign) law applicable to such set-off if such set-off is within the parameters of the BRRD regime as implemented in the law of that Member State.⁶⁴ It is not a given that the court of a third country will rule in accordance with the BRRD regime or the SRMR if it has to decide on the effects on set-off in its jurisdiction of a recovery or resolution measure taken by the competent Dutch authorities or the competent authorities of another EU Member State.

(p. 343) 22.44  The Act on Financial Supervision provides that the Dutch intervention rules with respect to a mandatory transfer of assets and/or liabilities of an insurance company, or the shares in such insurance company, apply to insurance companies having their seat in the Netherlands, irrespective of the applicable law.⁶⁵ It also provides that the restrictions on the exercise of contractual counterparty rights apply to contracts to which an insurance company is a party, irrespective of the law governing the contract.⁶⁶ According to the explanatory memorandum, this transfer regime and the restrictions on the exercise of contractual counterparty rights constitute overriding mandatory rules of Dutch law within the meaning of the Rome I Regulation. This entails that a Dutch court will only permit set-off against an insurance company that is in recovery or resolution in accordance with the (foreign) law applicable to such set-off if such set-off is within the parameters of the Dutch intervention rules with respect to insurance companies. It is not a given that a foreign court—including a court of another EU Member State—will rule in the same way if it has to decide on the effects on set-off in its jurisdiction of the Dutch intervention regime with respect to insurance companies. Although the Dutch legislature takes the view that these rules constitute overriding mandatory provisions of Dutch law within the meaning of the Rome I Regulation, it will ultimately be up to the foreign court to decide whether it agrees with this qualification and will give effect thereto.

22.45  In understanding the operation of the right of set-off in financial transactions with Dutch counterparties, it is vital to determine whether such right of set-off is being exercised outside insolvency proceedings or is being exercised against an insolvent party or a party that is subject to a recovery or resolution measure. This is important because depending on the situation at hand, different legal provisions may apply. Outside insolvency, the relevant provisions are to be found in the Dutch Civil Code. In insolvency, the relevant provisions can be found in the Dutch Bankruptcy Code, the EU Recast Insolvency Regulation, the EU Credit Institutions Reorganization and Winding-up Directive, and Solvency II, and in the provisions of Dutch Law implementing these directives. In a recovery or resolution situation, provisions of the BRRD and the SRMR and the Act on Financial Supervision may come into play. Outside insolvency, parties to a contract may agree to widen or restrict the statutory right of set-off. In an insolvency situation it will not always be possible to invoke a broader contractual right of set-off against the trustee. When a Dutch financial undertaking is subject to crisis (p. 344) prevention measures or crisis management measures, there may be restrictions for the counterparty on the exercise of a contractual right of set-off. A choice of law to govern the right of set-off will in principle be recognized under Dutch private international law. However, this rule is subject to exceptions in insolvency and in recovery and resolution situations.