In the First Quarter 2020 issue of our International Restructuring Newswire, we described and discussed the legislative proposal introducing a pre-insolvency restructuring mechanism in the Netherlands. The proposed law called Wet Homologatie Onderhands Akkoord or “WHOA” has been in the centre of attention of Dutch restructuring professionals for quite some time now. The WHOA is also referred to as the Dutch Scheme or the CERP (Court Confirmation of Extrajudicial Restructuring Plans).
The WHOA was submitted to the Dutch House of Representatives on July 5, 2019. The Netherlands were on track to be the first mover in implementing legislation attuned to the EU Restructuring Directive (EU 2019/1023). After quite some delay – partially due to the COVID-19 pandemic and extensive debate in parliament – the proposal was adopted by the House of Representatives on May 26, 2020, albeit with a few amendments to the initial proposal. In turn, the Dutch Senate on October 6, 2020 adopted the proposed law.
Restructuring professionals in the Dutch market are eagerly awaiting the enactment of the WHOA. Over the past year, law firms have speculated on the date of enactment, which was first expected on January 1, 2020 and later on July 1, 2020. Both these expectations were not met. The WHOA will enter into force at a date to be decided by Royal Decree (which is to be issued on a date yet to be determined at the time of writing this article). Based on the current planning of the Dutch Ministry of Justice and Safety, it is expected that the WHOA will be enacted on January 1, 2021.
It is safe to say that in anticipation of the WHOA, there are quite a number of restructurings in which a WHOA-procedure is considered either as a fall-back if consensual restructuring attempts fail or as a planned procedure to be set in motion once WHOA takes force.
Amendments to the proposed law
The amendments made by the House of Representative are—in short—as follows:
- Under secured creditors need to be put in two classes:
In the event a secured creditor’s collateral has insufficient value to fully pay the secured debt, the secured creditor will need to be placed in one class with its claim for the amount covered by the security and in another class for the remainder of its claim.
- Minimum threshold of 20 per cent for unsecured creditors up to a certain size:
Unless there are compelling reasons, when a plan involves the cram down of small unsecured trade creditors or creditors having a tort claim, the plan must provide that these creditors receive at least 20 per cent of their claim in cash. By means of this amendment, the interests of smaller creditors are sought to be protected. Small creditors are those who are considered small and micro companies according to Dutch corporate law or companies with less than fifty employees.
- Cash-out option for secured creditors is removed from the proposed law:
Under the law as originally proposed, if a class of creditors is crammed down by means of a cross-class cram down, the creditors that are being crammed down must have been given the option to cash-out at the liquidation value of their claim. If such option is not given, the plan could be rejected by the court. By means of the amendments, this rule has been limited in the sense that secured lenders do not need to be given the cash-out option in order for a plan to be eligible for confirmation if these secured creditors are crammed down. The cash out option however is retained for unsecured creditors.
Overview of the proposed law
The following is an overview and summary of the proposed WHOA as now amended by the Dutch House of Representatives and being considered by the Senate.
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.
- Limited court involvement; there is no court-assessment at the very start of the procedure.
- Cram-down and cross class cram-down are possible.
Who can take the initiative to prepare and propose a plan?
A plan can be prepared by the debtor itself or, alternatively, each creditor, shareholder or statutory works council or workplace representative set up in the debtor’s business may initiate a plan by requesting the court for a restructuring expert to be appointed.
The WHOA is designed to be used not only by large companies, but also by small and mid-size enterprises (SMEs) (which represent ninety-nine per cent of the businesses in the EU if the standards of the Directive 2013/34/EU of the European Parliament and of the Council are applied). The WHOA provides specific requirements when SME debtors are involved. SME debtors will have to approve: (i) the proposal of a plan by a restructuring expert; as well as (ii) the adopted plan to be submitted to the court for confirmation where the plan is sought to be crammed upon a dissenting class of creditors.
A dual-track – public and confidential procedures
The WHOA provides for a dual-track, meaning that at the very start of preparing the plan, the debtor or restructuring expert will have to choose to follow either the public procedure or the confidential procedure.
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 hearing will be public. 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 May 20, 2015 on insolvency proceedings (the Insolvency Regulation (recast)) and confirmed restructuring plans following a public procedure are consequently more easily recognised and enforced in the Member States of the EU. The Dutch courts will, however, in a public procedure only be able to assume jurisdiction if the COMI (centre of main interests) of the debtor is in the Netherlands.
The preparation of a plan in a confidential procedure is not announced and hearings will be held in chambers. This procedure will not fall within the scope of the Insolvency Regulation (recast), which is the reason that the Dutch courts may also assume jurisdiction to confirm a plan in the context of a confidential procedure where the debtor does not have its COMI in the Netherlands—provided such non-Dutch debtor has a sufficiently close connection to the Netherlands (the threshold for which is relatively low).
Which type of procedure is preferable will depend inter alia on the specifics of the matter and the location of the debtor’s creditors.
Two new players in the field
The WHOA introduces two new players in the field of Dutch insolvency proceedings, the restructuring expert and the observer.
A restructuring expert is (only) burdened with the preparation of a restructuring plan, not the day-to-day business of the debtor, as the debtor remains in possession while a restructuring plan is being prepared. Once the court has appointed a restructuring expert, the debtor can no longer propose a plan to its creditors and shareholders.
An observer is appointed in the case of a potential cross class cram-down or in case the court orders a general stay. The task of the observer is to monitor the process revolving around the preparation of the plan, taking into account the interests of the creditors of the debtor.
There are no statutory requirements for a professional or firm to be appointed as restructuring expert or observer. In the market, some say that bankruptcy trustees will be best suited for appointment as restructuring experts, whilst others consider the CRO-type of professionals to be most appropriate. It may even be that, offering services as restructuring experts may become a new niche. It seems safe to say that the specifics of different restructuring plans or different industries might cause the decision on who or what type of professional to appoint to vary on a case by case basis. In any event, time will tell.
The process: from financial difficulties to a confirmed plan
The process starts with the preparation of a restructuring plan. The proponent of the plan enjoys great flexibility, as long as it contains sufficient information in order for those entitled to vote to be able to make an educated decision on voting in favour or against its adoption. Apart from prohibiting the 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 restructuring of debt, a debt-for-equity swap and/or the issuance of new shares. Furthermore, the restructuring plan may provide for the amendment of obligations of 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 reciprocal contracts, such as leases. In addition, the rights of secured creditors may under circumstances be amended by means of the restructuring plan.
In the restructuring plan, creditors and shareholders whose rights are so different that they are not considered to be in a same position need to be divided into separate classes. The positions are considered against the backdrop of both: (i) their position in the case of liquidation of the debtor; and (ii) their rights under the restructuring plan (if confirmed). As a rule of thumb, shareholders should be placed in a separate class, as must for example holders of secured claims (to the extent their collateral secures their claim).
When finalised, the restructuring plan will be proposed to those allowed to vote, which are those (classes of) creditors and shareholders whose rights are sought to be impaired or amended. The rights of (classes of) creditors that are not allowed to vote cannot be impaired or amended by means of the restructuring plan.
A class is deemed to have voted in favour of the restructuring plan if creditors voting in favour in that class together represent two-thirds of the total amount of the claims of the creditors that have cast a vote in that class. There will be no headcount. 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 occasion in which the court will become involved in the process. Up until that moment, the procedure will have been conducted outside of any court-supervision.
The court will decide whether or not to confirm the restructuring 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 cannot reasonably be assumed that the debtor will be unable to continue paying its debts as they fall due absent the restructuring plan.
- The plan does not contain the required information for creditors.
- The class formation does not meet the statutory requirements.
- The performance of the plan is not adequately safeguarded.
- The plan is deceptive.
Furthermore, the court will—at the request of a nay-voting 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:
- Failure to comply with the best interests of creditors test.
- An unjustified breach of the absolute priority rule.
- Creditors (other than commercial secured lenders) that voted against the restructuring plan and are in a class that is about to be crammed-down are not given the opportunity to opt for a “cash-out” by reference to the value such creditor would have had obtained in case of a bankruptcy of the debtor.
Upon confirmation by the court, the restructuring plan is binding on the debtor and all that were entitled to vote on the adoption of the plan.
All in all, the whole process from the proposal of a restructuring plan until the court confirmation can be finalised within four to five weeks, as the timeframes provided for in the WHOA are relatively short.
In order to the smooth preparation of the restructuring plan and the continued business of the debtor in the meantime, the debtor or restructuring expert, may request the court to order a variety of supportive measures.
These supportive measures may include:
- A general or tailored stay, applying to the creditors jointly or to certain creditors respectively, for a period up to eight months.
- The suspension of a bankruptcy application in respect of the debtor.
- Lifting of attachments made.
- Protecting security granted for emergency funding against claw-back risks.
- Setting aside ipso facto and change of control clauses.
- Allowing the debtor to use encumbered assets in the ordinary course of its business against proper security.
- Bespoke provisions, such as declaring a pre-emptive right not applicable in case of issuing new shares.
Furthermore, the debtor or restructuring expert may—before the plan has been proposed to the creditors—ask the court to give a ruling on certain issues that are relevant in respect of the confirmation, in order to avoid obstacles in having a plan confirmed down the line. A ruling can entail a binding decision on issues such as the information required to be placed 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) would apply. Also, the court can decide that the management of an SME-debtor objects to the proposal of a plan for no good reason, and approve the proposal on behalf of the SME debtor.