International arbitration report
In this issue, we cover a broad spectrum of ‘hot button issues’ for boards and companies operating internationally.
On 1 January 2021, the Act on Court Confirmation of Extrajudicial Restructuring Plans, also referred to as the 'Dutch Scheme' (Wet Homologatie Onderhands Akkoord, "WHOA") entered into force.
In the Q1 2020 and Q4 2020 issues of our International Restructuring Newswire, we published articles on the Dutch Scheme, which introduces a pre-insolvency restructuring mechanism in the Netherlands.
The WHOA introduced for the first time in the Netherlands an effective restructuring mechanism outside of formal bankruptcy proceedings. The Dutch Scheme is based on elements of both the US Chapter 11 and UK schemes of arrangement procedures.
Since its enactment this year, there have already been 16 judgments concerning restructuring plans under the Dutch Scheme that have been rendered (and published) by several Dutch courts, which have analysed several elements of the new restructuring tool.1
As a general note, the judgments are composed in a very clear and comprehensive manner, and consider all elements relevant for the requests in a step-by-step manner. This allows parties and practitioners to quite easily compare the reasoning of the courts on specific points.
In this article, we discuss some of the court decisions relating to:
The WHOA provides for a dual-track approach, meaning that at the very start of the (formal) process, the debtor will have to choose to follow either the public procedure or the confidential procedure set out in the WHOA. Most of the judgments to date relate to confidential procedures, so it is not possible to determine the specific debtors to which they relate, but in some of the published judgments, the debtor entities were disclosed and more information is available.
The courts have considered three plans to date, two of which have been confirmed, and the other was rejected.
The first confirmation decision was given within two months of the new law coming into force. The decision related to two companies, Jurlights B.V. and its parent Jurlights Holding B.V. Jurlights developed audio-visual technical productions for large-scale events globally. In early 2020, the activities of the company came to a standstill as a result of the various Government measures that were implemented as a result of the COVID-19 pandemic. After an initial reorganisation of its business, Jurlights proposed a plan in mid-2020, which was not approved by the creditors. At the end of December 2020, Jurlights proposed a new plan to its creditors in expectation of utilising the Dutch Scheme to be enacted effective as of 1 January 2021. The plan was proposed to three classes of creditors the 'retentor'2, the Dutch Tax Authorities and the unsecured creditors. The retentor and the class of unsecured creditors voted in favour of the plan within the voting deadline. The Dutch Tax Authorities informed the debtor, albeit after the deadline for voting lapsed, that it agreed to the plan. After Jurlights had obtained the support of the creditors, a request for confirmation was submitted to the Dutch court.
The court found that it was reasonable to expect that Jurlights would not be able to continue paying its debts without the plan and that, absent the restructuring, the only alternative would be bankruptcy. The court also found that the creditors were sufficiently informed and were given an adequate opportunity to vote on the plan, and that the class formations were correct.
One dissenting creditor objected to the confirmation, stating, among other things, that its invoice pre-dated the COVID-19 pandemic and that it would be worse off under the plan than in the event Jurlights were to be declared bankrupt. The former argument was irrelevant in considering whether or not the plan was eligible for confirmation. On the latter point, the court concluded (on the basis of the submission of Jurlights) that the creditors were better off under the plan than in the event of a bankruptcy and therefore declined to reject the confirmation on the basis of the arguments raised by the dissenting creditor.
Despite the contentious aspects of this case, the full (formal) process was completed within six weeks; the starting declaration was filed with the court on 11 January 2021, and the plan was confirmed by the court on 19 February 2021.
The court noted that Jurlights and its parent submitted a joint restructuring plan to their creditors, but instead should have presented two separate plans before asking the court to confirm these plans. The court did however take a pragmatic and lenient approach on the basis that it must have been clear to the creditors that in substance there were two separate plans and given that all creditors of the parent voted in favour. This approach was taken as the Dutch Scheme legislation only entered into force recently and the law, in the words of the court, may not be entirely clear on this point. However, the court noted that the law does not technically allow for combined or joint plans (other than to the extent group guarantees are restructured). Practitioners and debtors should pay heed to this point in future WHOA proceedings.
In another case, the debtor omitted one (unsecured) creditor and failed to invite that creditor to vote on the plan. However, that creditor was later included in the plan and invited to vote nevertheless. Initially, the creditor voted against the plan, but after further discussion the creditor changed its vote and agreed to the plan. The court ruled that the plan could not be formally declared binding on that creditor because it was not included in the plan before the voting by the other creditors.
The question arose whether the omitted creditor would receive better treatment than the other unsecured creditors (that were included in the plan) in an "unjustifiable manner." The omitted creditor would receive better treatment because its claim would be left unaffected as a result of the creditor being omitted, whilst the claims of those creditors that were placed in the same class in which the omitted creditor should have been placed would be compromised.
The court held that, although the omitted creditor was not included in the plan formally, in substance it was not treated differently from the other unsecured creditors that were included in the plan, because the debtor and the omitted creditor concluded a separate agreement outside of the plan by means of which the debt owed to the omitted creditor was restructured equally to the debts owed to the unsecured creditors that were part of the plan.
The court confirmed the plan and declared that the plan was not binding on the initially omitted creditor on the basis that said creditor received equal treatment because of the separate agreement reached.
The court rejected a plan presented by an entrepreneur operating as a sole proprietor. According to the entrepreneur, the financial distress was caused by his illness and in addition the economic impact of the COVID-19 pandemic. The court rejected the plan for several reasons.
First, the plan was initially submitted to unsecured creditors and the Dutch Tax Authorities, but the debtor asked that the court confirm the plan only as to the unsecured creditors. The reasoning given by the debtor was that the amount of the Dutch Tax Authorities' claim was unclear, as it could decrease or increase compared to the amount stated in the plan. As a result, the request for confirmation deviated from the scenario on which the voting creditors had based their decision.
Second, the information that was provided by the debtor contained severe gaps and inaccuracies. Among other things: in the list of creditors that was presented, not all names of the actual creditors were included, not all claim amounts were correctly specified, not all relevant contingent debts were presented to the creditors and the existence of a secured creditor was left unmentioned.
Last but not least, the debtor did not present the results of a business viability study to its creditors, which indicated that the business would not be viable. This study was undertaken in the context of a prior application for funding by the municipality of The Hague, which was denied on the basis of the results of that study. The court considered that, although in principle it would be up to the creditors to form a view as to whether the business of the debtor would be viable post-restructuring, the court found itself competent, on the basis of the results of the business viability study, to determine that the business would not be viable post-restructuring. After all, the Dutch Scheme is intended to prevent viable businesses (or parts thereof) from becoming bankrupt. On that basis, the court rejected the plan.
Finally, the court was not satisfied that creditors would have voted in favour of the plan if they had been presented with all of the correct and complete information.
This case shows that although the Dutch courts take a pragmatic and accommodating approach when applying the Dutch Scheme, the Dutch courts seek to protect the interests of creditors involved on the basis of the creditor protection mechanisms provided in the new legislation. A proper preparation of the plan and the information to be presented to the creditors and/or shareholders involved is of crucial importance.
To date, five requests for the appointment of a restructuring expert have been handled by the Dutch courts. A restructuring expert can either be appointed at the request of the debtor or at the request of its creditors, shareholders or a statutory works council or workplace representative (i.e., labour representatives) set up for the debtor's business.
The requests to the courts so far have been made by the debtors themselves. In that scenario, a restructuring expert can be appointed in the event it is reasonably expected that the debtor will not be able to continue paying its debts. The restructuring expert is, whether or not appointed at the request of the debtor itself, required to prepare the plan on behalf of the debtor. The restructuring expert needs to be someone who can perform their duties effectively, impartially and independently. In one judgment, the court stated that the restructuring expert should be someone who brings the various parties in the restructuring together and facilitates negotiations and ensures that the process runs smoothly. If a proposed restructuring expert meets these general criteria, and the procedural rules of the courts have been adhered to by the debtor, the courts have shown in three decisions a willingness to appoint a restructuring expert.
In those decisions where the appointment of a restructuring expert was denied, the debtor either did not submit sufficient proposals from various prospective restructuring experts as prescribed by the procedural rules of the courts, or the request was not made with a view to preparing a restructuring plan, but rather to assist the debtor in bringing its books and record-keeping into order (which is not the statutory purpose of a restructuring expert under the WHOA). The decision by the courts to reject appointing restructuring experts in those cases is not surprising.
In four of the decisions that are publicly available to date, the court rendered a decision on the declaration of a cooling-off period. A cooling-off period or, in more international terms, a moratorium can be declared by the court at the request of the debtor (or the restructuring expert) if it is prima facie shown that it is necessary to continue the business of the debtor while the plan is being prepared. This may be the case in the event it is reasonably expected that if a cooling-off period is not declared, the debtor runs a significant risk of either one of its creditors or shareholders filing for its bankruptcy, or taking recourse or enforcement actions. During the cooling-off period, such rights of creditors and shareholders are suspended.
A cooling-off period is only declared by the courts if the debtor shows that either (i) it has proposed a plan to its creditors and/or shareholders, or (ii) it has committed to propose a plan within two months from the request for a cooling-off period, or (iii) where a restructuring expert has been appointed. In one case in which none of these requirements was met, the court denied the request for the declaration of a cooling-off period (and a request to lift attachments).
In deciding whether or not a cooling-off period should be declared, the court is required to consider whether the cooling-off period is in the interests of the creditors and that the interests of those who are (temporarily) prevented from taking action during such cooling-off period are not substantially affected. The courts take a pragmatic approach in this regard by taking the view that the cooling-off period is indeed in the interests of the creditors if they can expect a better recovery under the plan than in the event of a bankruptcy of the debtor (in circumstances where a cooling-off period is not declared).
Interestingly, in one of the decisions, the court declared a cooling-off period in the context of a process in which a liquidation plan (rather than a restructuring plan) was prepared. One of the creditors stated that a cooling off period was improper under the WHOA since the business was not intended to continue and an orderly wind-down was envisaged (and, actually, the business of the debtor was no longer operating). The court, however, ruled that the Dutch Scheme provides for the possibility of both restructuring plans and liquidation plans, and that in line with the apparent purpose of the WHOA, a cooling-off period could also be granted where the Dutch Scheme involves a liquidation plan to facilitate an orderly wind-down of the debtor.
In another decision, the court specifically exempted from the cooling off period one of the secured creditors who had a disclosed right of pledge over account receivables.
Attachments levied can be lifted by the court at the request of the debtor (or the restructuring expert), if it is prima facie shown that the interests of those who levied the attachments are not substantially affected.
Where the court has lifted attachments on equipment and inventory, it was stated that although the interests of those who levied the attachments were affected, the court was of the view that their interests were not affected substantially, given that the equipment would only be used to a limited extent and therefore its value would not (substantially) decrease. Furthermore, the court considered that if the debtor could not freely sell its inventory in this case, the chances of a successful restructuring would be very limited. This would likely result in imminent bankruptcy, in which those who had levied the attachments would not be able to recover any amounts because the attachments would cease to exist in the event the debtor is declared bankrupt.
In the Jurlights case, the court allowed the debtor to terminate the lease of three printers which would otherwise expire in December 2023. The lease of the printers was on onerous terms to the debtor and the printers were not needed post-restructuring. In order not to leave the lessor completely empty-handed, the debtor was required to include the damages claim of the lessor (equal to the rent under the lease until initial expiry) in the restructuring plan, as is prescribed by the new law.
To date, the court has only been requested once for permission for the debtor to obtain emergency financing. On the basis of the WHOA, the debtor (or its restructuring expert) can apply for permission of the court to enter into agreements (or commit other legal acts). Permission is to be granted by the court if the relevant agreement is necessary to continue the business during the preparation of the plan, and it is reasonably expected to be in the interests of the creditors and the interests of individual creditors are not substantially affected. If the permission of the court is obtained, it eliminates the clawback risk in respect of such transaction in the event the restructuring fails and the debtor is declared bankrupt.
Interestingly, the one judgment allowing the debtor to obtain financing did not mention any security being granted in exchange for the emergency financing. However, another judgment relating to the same debtor's restructuring indicates the emergency financing was (factually speaking) granted on an unsecured basis. As a result, one may query whether it was necessary to obtain the permission of the court since unsecured financing will not usually be at risk of clawback.
Under the Dutch Scheme, the debtor or the restructuring expert (if appointed) can ask the court to render an interim decision in respect of matters that are relevant for achieving a plan. For example, prior to the plan being put up for voting, the court may be asked to give a binding decision on the class formation as presented by the debtor or restructuring expert. This is of (great) importance because an incorrect class formation would result in a restructuring plan not being approved by the court.
Under the Dutch Scheme, certain groups of creditors that have the same rank may be treated differently under a plan by being placed in separate classes. If the less favourably treated class votes in favour of the plan with the required majority, then of course such plan can be confirmed by the court. Even if the less favourably treated class does not vote in favour of the plan, the plan can nevertheless be confirmed where reasonable grounds exist for the unequal treatment.
In one case, the court was asked to give a binding interim judgment on whether or not there was a reasonable ground to treat creditors with claims that arose before a certain cut-off date differently than creditors with claims that arose after that cut-off date. The court answered this question in the affirmative. The reasoning of the court was that the liabilities incurred after the cut-off date were necessarily incurred, and if they had not been incurred, bankruptcy of the debtor would have been unavoidable. Against that background, the court decided that there were reasonable grounds to leave the claims of the creditors after the cut-off date out of the plan (and hence unaffected) while restructuring the claims of the creditors of before the cut-off date.
Many features of the WHOA have been tested within the first three months of the legislation being introduced. The courts have shown a pragmatic and lenient approach in handling the various requests made, whilst safeguarding the interests of the creditors and/or shareholders involved. From the first published cases, we can conclude that the Dutch Scheme is working effectively, which bodes well for Dutch companies in need of a first class restructuring tool.
We will continue to monitor the published cases on the Dutch Scheme and share updates in due course.
In this issue, we cover a broad spectrum of ‘hot button issues’ for boards and companies operating internationally.
Norton Rose Fulbright’s sports law team have analysed a range of sources to compile research into the ownership of English Premier League (EPL) clubs.
© Norton Rose Fulbright LLP 2021