On 5 July 2019, the Dutch legislative proposal on the Act on confirmation of private plans (de Wet homologatie onderhands akkoord; the "WHOA") was submitted to the Dutch House of Representatives. The WHOA will, once enacted, represent the introduction of an effective restructuring mechanism in the Netherlands for the first time, with concepts similar to UK schemes of arrangement and US chapter 11 procedures. Enactment is expected to take place in 2020.
The first restructuring mechanism in the Netherlands outside of formal insolvency proceedings
The WHOA aims to improve the reorganisation capabilities of companies that have viable businesses, but carry too much financial debt. Currently, no restructuring mechanism is available in the Netherlands outside of formal insolvency proceedings (suspension of payment proceedings and bankruptcy), which have proven at times to be difficult tools for reorganisation. Currently, an out of Court restructuring plan can only be approved if all creditors consent. The lack of an effective restructuring tool can allow creditors to block a necessary restructuring (perhaps unreasonably at times). In doing so, the creditor can exert leverage and manoeuvre itself into a position more favourable than it would occupy in the event of a liquidation of the debtor's assets. The WHOA seeks to prevent just that, facilitating the confirmation of a restructuring plan and ensuring that it is binding on dissenting creditors.
The Netherlands is the first Member State in the EU proposing new legislation for the implementation of the "Restructuring Directive" (Directive 2019/1023 on preventive restructuring frameworks, on discharge of debt and disqualifications, and on measures to increase the efficiency of procedures concerning restructuring, insolvency and discharge of debt). The procedure(s) provided through the WHOA are meant to be swift, flexible and efficient, and in a large part is based on elements of both the US chapter 11 and the UK scheme of arrangement.
The Dutch implementation of the Restructuring Directive
In our Fall 2019 International Restructuring Newswire, Matthew Thorn and Manhal Zaman provided a report and description of the key aspects of the Restructuring Directive (as well as similar reforms in the United Kingdom). As was noted there, the Restructuring Directive is dependent on EU Member State implementation through legislation and thus provides a platform for competition among Member States for establishing user-friendly restructuring procedures. In this article, the focus will specifically be on the implementation of the Restructuring Directive in the Netherlands, so far as the introduction of a preventive restructuring framework is concerned.
The proposal for the WHOA was submitted to the Dutch House of Representatives ten days after the European Parliament and the Council published the text of the Restructuring Directive. By doing so, the Netherlands has taken the first shot at implementation and at seeking to become a leading restructuring hub globally. The timing could not have been better, as the economic indicators seem to point towards the next downturn in the next six to twelve months.
Some key characteristics
The procedure provided in the WHOA has a number of key characteristics, for example:
- it is a debtor-in-possession procedure;
- the procedure is conducted outside of formal bankruptcy proceedings;
- there is limited Court involvement; there is no Court-assessment at the very start of the procedure;
- cram-down and cross class cram-down are possible; and
- intended to being used for all sizes of enterprises, including small and medium sized enterprises (SMEs), to which a number of specific additional provisions apply.
Who can take the initiative to prepare and propose a plan?
A debtor can propose a plan to its creditors and shareholders if it can reasonably be assumed that the debtor will not be able to continue paying its debts as they fall due. The debtor however does not enjoy total exclusivity in the plan process. Each creditor, shareholder or statutory works council or workplace representative set up in the debtor's business (these are bodies that represent the companies workers) may request that the Court appoint a 'restructuring expert', who has the right to propose a plan for the debtor.
Under the WHOA, SMEs will have to approve the proposal of a plan by a 'restructuring expert'; as well as submitting the adopted plan to the Court for confirmation in case the plan will possibly be forced upon a dissenting class of creditors.
A dual-track approach – public and confidential procedures
The WHOA provides for a dual-track approach, meaning that at the very start of preparing the plan, the debtor or 'restructuring expert' will choose to follow either the public procedure or the confidential procedure as set out in the WHOA.
In a public procedure, the preparation of a plan is published in the Dutch central insolvency register, the Dutch Government Gazette and the Dutch trade register and any Court hearings will be public. Conversely, the preparation of a plan in a confidential procedure is not announced and any Court hearings will be held in chambers. The public procedure will be submitted to be included in Annex A of the EU regulation 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (the "Insolvency Regulation (recast)"). On the other hand, the confidential procedure will not fall within the scope of the Insolvency Regulation (recast).
As a consequence, confirmed restructuring plans following a public procedure are likely to be more easily recognised and enforced in the Member States of the EU, whilst Dutch Courts may more readily assume jurisdiction to decide on, inter alia, the confirmation of restructuring plans prepared in the course of a confidential procedure. Which path to choose will depend on the specifics of the matter and the location of the debtor's creditors. Interestingly, by making use of the confidential procedure, non-Dutch debtors may seek to have their restructuring plan confirmed by the Dutch Courts in accordance with the WHOA – provided they have a sufficiently close connection to the Netherlands (the threshold for which is relatively low).
Two new players in the field
The WHOA introduces two new players in the field of Dutch insolvency proceedings, the aforementioned 'restructuring expert' and the 'observer'.
The role of a 'restructuring expert' is limited to the preparation of a restructuring plan. The 'restructuring expert' is not involved in the day-to-day business of the debtor, as the debtor remains in possession while a restructuring plan is being prepared and proposed by the 'restructuring expert'. Upon the appointment of a 'restructuring expert' by the Court, the debtor can no longer propose a plan to its creditors and shareholders, but the debtor can request the 'restructuring expert' to propose the debtor's plan to its creditors and shareholders and put that plan to a vote.
An 'observer' comes into play in the event of a proposed cross class cram-down under a plan or where the Court orders a general stay. The task of the 'observer' is to monitor the process relating to the preparation of the plan, taking into account the interests of the creditors of the debtor.
The WHOA does not detail the competences or qualifications required for appointment as a 'restructuring expert' or 'observer'. In the Dutch restructuring market, various opinions exist as to the suitability of individuals for appointment to these roles. Some practitioners are of the view that bankruptcy trustees will be best-suited for appointment as a 'restructuring expert', whilst others consider the CRO-type of professionals to be most appropriate. Potentially, offering services as restructuring experts will become a new niche in professional circles in the Netherlands. Time will tell, and the circumstances affecting particular companies – and the specifics of restructuring plans required – might mean the suitability of particular candidates will vary on a case-by-case basis.
The process: From financial difficulties to a confirmed plan
The process starts with the preparation of a restructuring plan by either the debtor or the 'restructuring expert'. The debtor or 'restructuring expert', as the case may be, enjoys great flexibility in formulating the arrangements to be included in the restructuring plan. The WHOA prescribes that the restructuring plan needs to contain certain information in order for the creditors to be able to make an educated decision on voting in favour or, or against, its adoption. Apart from prohibiting impairment or amendment of rights arising from employment contracts, the WHOA does not set limitations on the arrangements that can be included in the restructuring plan. For example, the restructuring plan can provide for a reduction and/or restructuring of the debt, a debt-for-equity swap, or the issuance of new shares. Furthermore, the restructuring plan may provide for the restructuring of obligations of affiliated group entities of the debtor, effectively allowing for group restructurings. Also, the restructuring plan may entail the amendment and – if such amendment cannot be agreed upon – the termination of burdensome contracts akin to the rejection power found in US chapter 11 procedures. In addition, the rights of secured creditors may, in certain circumstances, be amended by the restructuring plan.
In the restructuring plan, the creditors and shareholders must be divided into classes. The WHOA provides that creditors whose rights are so different that they are not considered to be in a similar position, should be placed in different classes. Such comparison of positions is to be made against the backdrop of both: (i) the creditors' position in the event of the liquidation of the debtor; and (ii) their rights as varied by the restructuring plan (if confirmed). As a rule of thumb, shareholders should be placed in a separate class, as must be holders of a right of pledge and other secured creditors (for example).
When finalised, the restructuring plan will be proposed to those (classes of) creditors and shareholders whose rights are sought to be amended. Only affected creditors will be allowed to vote. The debtor or 'restructuring expert' can decide to submit the plan only to one or a few classes of creditors. The rights of other creditors cannot be amended by means of the restructuring plan.
A class is deemed to have voted in favour of the restructuring plan if creditors together representing two-thirds of the total amount of the claims of creditors in that class voting in favour. There is no headcount or numerosity requirement that needs to be satisfied. If at least one class of creditors has voted in favour of the restructuring plan, the plan can be submitted to the Court for confirmation. If no 'restructuring expert' or 'observer' is appointed and no interim decisions are requested by the debtor, the confirmation hearing will be the first time the Court becomes involved in the process. Up until that moment, the procedure will be conducted outside of any Court-supervision.
If the restructuring plan is submitted to the Court, the Court will decide whether or not to confirm the plan. In that context, the Court is required to consider the so-called 'general grounds for refusal' at its own initiative.
General grounds for refusal include:
- it is not reasonably likely that the debtor will be unable to continue paying its debts as they fall due, in absence of a restructuring plan;
- the plan does not contain the prescribed information;
- the class formation does not meet the statutory requirements;
- the performance of the plan is not adequately assured; and
- the plan is deceptive.
Furthermore, the Court will – at the request of a dissenting creditor that is (or should have been) placed in a class that has voted against the restructuring plan – consider the so-called 'additional grounds for refusal'.
Additional grounds for refusal include:
- a failure to comply with the 'best interests of creditors' test, which means that creditors should not be worse off under the plan than in case of bankruptcy of the debtor;
- an unjustified breach of the absolute priority rule, which requires that lower ranking creditors cannot receive value unless higher ranking creditors are fully paid; and
- creditors that voted against the restructuring plan and are in a class that is to be crammed-down are not given the opportunity to opt for a "cash-out" equal to the value such creditor would have had received in the case of a bankruptcy (liquidation) of the debtor.
Upon confirmation by the Court, the restructuring plan is binding on the debtor and all creditors that were entitled to vote on the plan.
From start to finish, the process from the proposal of a restructuring plan until the Court confirmation should be capable of being finalised within four to five weeks, as the procedural timeframes provided for in the WHOA are relatively short.
Supportive measures
At the request of the debtor or 'restructuring expert', the Court may order a variety of supportive measures. These measures are intended to facilitate the smooth preparation of the restructuring plan and the continuation of the business of the debtor during the interim period.
These supportive measures include:
- a general or tailored stay, applying to all creditors or only to certain creditors, for an initial period of four months, with the possibility of a four-month extension;
- the suspension of a pending bankruptcy (liquidation) application in respect of the debtor;
- the lifting of attachments;
- protecting security granted for emergency funding against claw-back risks;
- setting aside ipso facto and change of control clauses in contracts;
- allowing the debtor to use encumbered assets in the ordinary course of its business in exchange for proper security, similar to adequate protection in US chapter 11 procedures; and
- bespoke provisions, such as declaring a pre-emptive right inapplicable in the circumstance where new shares are to be issued in the plan.
Furthermore, before the plan has been proposed to the creditors for voting purposes, the Court can be asked to give rulings on certain issues that are relevant in respect of the confirmation. Such rulings can be requested by the debtor or the 'restructuring expert'. A ruling can include a binding decision on issues such as the scope and adequacy of the disclosure information required to be provided in the plan, class formation, the admission of a creditor to a certain class, or whether any of the grounds for refusal (general or additional) exist. It is hoped that allowing the debtor and restructuring expert to ask for such a binding ruling early in the process will mean that obstacles to seeking confirmation of a plan can be avoided down the line.
Expectation
If the WHOA is enacted as currently drafted and within the expected timeframe, the Netherlands will be at the forefront of implementing the Restructuring Directive. The WHOA may very well serve as a blueprint for those Member States of the EU that do not currently have detailed restructuring legislation (or proposals) in place.
Restructuring lawyers and accountants in the Netherlands anticipate that the WHOA will be enacted in a form which closely follows the current proposal; only few changes to the proposal are expected at this stage (if at all). The legislative process is expected to be finalised in 2020 (it is currently with the Dutch House of Representatives and will still need to go through the Dutch Senate before it enters into force). Stay tuned for further developments.
Koen Durlinger is an associate in our Amsterdam office in the firm's dispute resolution and litigation group.
