Fleur Diderich, 28 February 2025

The settlement in bankruptcy

When a bankruptcy has been declared and it cannot formally be reversed, there is still a possibility to escape the usual winding-up of the bankruptcy. That option consists of offering a settlement to creditors. A settlement may offer creditors a better outcome than a complete liquidation of the estate. In this blog, we discuss the procedure, the relevant articles of law and the advantages and risks related to offering a settlement in bankruptcy. We also discuss the difference between the bankruptcy settlement and the WHOA.

What is a settlement in bankruptcy?

A settlement in bankruptcy is an arrangement under the Bankruptcy Act (FW) in which the bankrupt makes a proposal to his creditors to pay part of the debts, usually against final discharge of the residual debt.

The procedure

Offering a settlement in bankruptcy proceeds in several stages:

1. Drawing up the settlement (art. 138 Fw): the bankrupt or a third party draws up a proposal describing what percentage of claims will be paid to creditors and under what conditions.
2. Deposit draft settlement (art. 139 Fw): the bankrupt shall deposit a draft settlement at the court registry at least eight days before the meeting of creditors, while simultaneously sending it to the trustee.
3. Trustee’s advice(art. 140 Fw): the trustee assesses the settlement and gives advice to the creditors and the supervisory judge).
4. Voting by creditors(Section 145 Fw): at the meeting of creditors, the settlement is voted on. The settlement is adopted if more than half of the voting creditors vote in favour, and these creditors represent at least half of the total debt).
5. Approval by the court(art. 150-157 Fw): if the required majority agrees, the proposal is submitted to the court for approval. The court assesses whether the settlement is fair and lawful. If approved, the settlement becomes binding on all unsecured creditors.

Advantages and risks of a settlement in bankruptcy

A bankruptcy settlement has the advantage that, as a rule, a higher distribution to unsecured creditors can be realised than with an ordinary winding-up of the bankruptcy. The bankruptcy can also be finalised faster, and part of the bankruptcy costs can be saved. Finally, a settlement offers the possibility for the debtor to continue with a clean slate and to continue the (restructured) business within the same legal entity.

A bankruptcy settlement does not always provide the desired solution. For instance, the agreement may fail because the required majority is not achieved, the court may refuse the approval because the settlement seems unreasonable or unfair, and the settlement only applies to unsecured creditors, allowing, for instance, pledge and mortgage holders to continue exercising their rights.

Difference with WHOA

A settlement in bankruptcy is not the same as a WHOA agreement, which can be offered outside bankruptcy to prevent imminent bankruptcy.

Since the entry into force of the WHOA on 1 January 2021, there is an additional possibility to restructure debts without bankruptcy. The main differences between a WHOA agreement and an agreement in bankruptcy are:

Both tools can be useful, depending on the company’s situation.

Conclusion

A settlement in bankruptcy offers bankrupts and creditors a chance for a more favourable settlement than a complete liquidation. However, the legal framework of the Bankruptcy Act imposes strict conditions on the procedure, including creditor and court approval.

Do you have questions about offering a settlement in bankruptcy or are you facing a settlement as a creditor? If so, please contact us. Wieringa Advocaten is happy to assist you.

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Fleur Diderich

+31 20 5313006

diderich@wieringa.nl

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