On 1 January 2021, the Act on Court Confirmation of Extrajudicial Restructuring Plan (Wet Homologatie Onderhands Akkoord, WHOA) entered into force. Contrary to expectations, the first year of the WHOA has been marked by restructurings of small and medium-sized enterprises (SME). At the end of 2021, approximately 150 restructurings under the WHOA were pending, 90 court orders had been published under the WHOA and 16 of these court orders related to the confirmation of a restructuring plan under the WHOA.
We have now seen the successful use of the Dutch scheme for larger restructurings as well. In late 2021 and early 2022, restructuring plans in two large WHOA proceedings were confirmed by the Dutch courts.
Since the first large Dutch scheme was a non-public WHOA proceeding, the name of the debtor is not publicly available. Nevertheless, it is commonly known in the restructuring market that the debtor group was operating a chain of fitness centres. The Dutch scheme was used to implement a financial restructuring involving a direct lender providing a senior term loan and a bank providing a super senior revolving credit facility. The second large Dutch scheme was the largest public WHOA proceeding so far and related to the restructuring of ADO Den Haag, a Dutch football (soccer) club that has played in the Dutch premier division for a number of seasons. The restructuring commenced due to the shareholder not providing capital to the club, resulting in a distressed M&A transaction where a new investor stepped in and acquired the club.
In both of these WHOA proceedings, several judgments were rendered by the Dutch courts, and important features of the Dutch scheme have been tested, reason enough for another update on the Dutch scheme which will be valuable to companies, lenders, and other creditors.
Fitness Centre Chain – Leveraged finance restructuring
The appointment of a restructuring expert
The WHOA provides for the appointment of a restructuring expert either at the request of the debtor or its creditors, shareholders or employee representative bodies. This Dutch scheme was initially commenced by the debtor, but subsequently, one of the creditors requested the appointment of a restructuring expert, which was supported by the majority of creditors. Even though one of the creditors strongly objected, the court decided to appoint the restructuring expert and ordered that his fees would be for the account of the creditors.
The creditors under the restructuring plan
When designing a restructuring plan using the Dutch scheme, the restructuring expert may choose to address the plan only to certain classes of creditors and/or shareholders and leave other classes of creditors out (and thus their position or claims unaltered). In the fitness centre chain restructuring, the restructuring expert included only three classes of creditors in the restructuring plan: (i) one super senior RCF lender with a claim of EUR 15 million (the RCF Lender); (ii) one senior Term Loan B lender with a claim of EUR 110 million (the TLB Lender); and (iii) the Dutch Tax Authorities. Trade creditors (and other creditors) were not included in the plan.
The content of the restructuring plan
Under the restructuring plan, the Dutch Tax Authorities were asked to agree to a repayment scheme, the shareholder was requested to make available additional liquidity of EUR 4 million, and amendments to the finance documents were proposed, e.g. rolling up of interest (PIK-interest), a covenant holiday and new financial covenants for the period thereafter. The proposed restructuring plan did not include a debt-reduction.
The WHOA proceeding was quite litigious. During the process of preparing the plan, the restructuring expert asked the court twice for interim relief on questions that were important in the context of the restructuring plan. The Dutch scheme legislation provides an opportunity for the restructuring expert (or the debtor itself if no restructuring expert is appointed; but not for the creditors or shareholders) to request such interim relief.
The most interesting interim relief granted by the court in the context of this restructuring clarified the following matters under the Dutch scheme:
- A moratorium under the WHOA prevents the security agent from exercising the voting rights attached to the pledged shares, even if these have already been validly transferred to the security agent following an event of default and a notice to that effect;
- A ruling under the WHOA that certain creditors (or shareholders) may be put into a class and with the amount of their claim set only for voting purposes (i.e. the amount the creditor is entitled to vote on the plan) and not a ruling on the validity or amount of such claim for any other context;
- The parties involved in a WHOA proceeding are held to act reasonably and take into account the justified interests of the other parties involved, and if their behaviour constitutes abuse of law, this may have consequences for the exercise of their voting rights. (In this restructuring, that meant that the TLB Lender could not exercise the voting rights for debt it had purchased from the RCF Lender);
- The Dutch scheme legislation provides for a procedure to amend or terminate onerous contracts, but the amendment of financial covenants, maturity dates or other terms of the finance documents are a restructuring of creditors' rights and not a change of the contract and, hence, the procedure for amendment and termination of onerous contracts does not apply to such a restructuring of finance documents;
- After a fierce valuation fight relating to both the liquidation value as well as the reorganisation value, the court decided to establish the values as were presented by the financial advisers retained by the restructuring expert; and
- The Dutch scheme legislation provides for the exculpation or exclusion of liability of the restructuring expert only for damages resulting from efforts to compose a plan, and further exclusions of liability of the restructuring expert under the restructuring plan are, in principle, not permitted.
Voting and (the objection to) confirmation
The Dutch Tax Authorities voted in favour of the plan because the proposal was in line with the relevant internal guidelines of the Dutch Tax Authorities on accepting proposals in restructurings. The TLB Lender voted against the restructuring plan. The RCF Lender abstained from voting, given that it had sold and transferred its position to the TLB Lender in accordance with the provisions of the intercreditor agreement.
The restructuring expert submitted the restructuring plan to the court for confirmation requesting a cross-class cram down, given that the Dutch Tax Authorities voted in favour of the plan. The TLB Lender objected to confirmation arguing (among other things) that neither the 'best-interest-of-creditors test' nor the 'absolute priority rule' were satisfied.
The TLB Lender argued that it would be worse off under the plan than it would be in the event of liquidation of the debtor resulting in a violation of the 'best-interest-of-creditors test'. The TLB Lender supported its arguments with a fierce valuation fight. The court ruled, however, that the claim of the TLB Lender would remain partially unpaid in the event of liquidation based on the liquidation value, while the TLB Lender would receive full payment of its claim under the Dutch scheme. On this basis, the court ruled that the 'best-interest-of-creditors test' was satisfied.
Further, the TLB Lender argued that the ´absolute priority rule´ was violated by the plan. The court, however, ruled that all creditors involved in the Dutch scheme were receiving full compensation. Therefore, the 'absolute priority rule' was not breached even though the shareholder retained its interest.
Given that none of the grounds for refusal applied, the court confirmed the restructuring plan. As such, the TLB Lender and the RCF Lender were crammed down.
Even in complex and litigious WHOA proceeding, the Dutch scheme can be a flexible, swift and well-designed restructuring tool. The judgments in this WHOA proceeding again underpin that preparation is key to a successful restructuring. In addition, requesting interim relief on issues that are unclear during the preparation of the restructuring plan, but which are crucial in order for the restructuring to succeed, appear to significantly contribute to the process. This right to seek interim relief regarding plan issues, which provides legal certainty throughout the process for all stakeholders, is one of the strengths of the Dutch scheme.
ADO Den Haag restructuring
The opening of the WHOA proceeding
ADO Den Haag had been experiencing financial challenges for several years, including a liquidity shortage. In response, the shareholder provided a liquidity guarantee, but then failed to pay under the guarantee (even after a court order obtained by the club). Consequently, ADO Den Haag filed a start declaration which marked the commencement of a public WHOA proceeding on 3 May 2021.
The court rendered various judgments in the WHOA proceeding which contain interesting elements worth elaboration.
Moratorium and protection against fraudulent conveyance
ADO Den Haag requested that the court: (i) declare a four-month moratorium; (ii) appoint a restructuring expert; and (iii) approve the transfer of one of the players to another soccer club. This approval was requested to eliminate the risk of claw-back on the basis of fraudulent conveyance in a subsequent bankruptcy (i.e. if the restructuring failed).
By judgment of May 25, 2021, the court:
- declared a moratorium up to and including 1 August 2021 (short of the debtor's request for a four month moratorium );
- granted the request to appoint a restructuring expert; and
- denied authorization for the player transfer.
Most interestingly, the court denied authorization to transfer of the player on the basis that it could not establish whether the proposed consideration for the transfer was at a fair market value and therefore would not be detrimental to creditors. Further, the court held that it was insufficiently explained whether the proposed transfer was necessary to finance the business of the debtor pending the preparation of the restructuring plan. However, the denial did not prevent ADO Den Haag from completing the transfer; it only deprived the transaction from claw back protection.
Extension of moratorium and authorization for bridge facility
During the proceeding, the restructuring expert requested an extension of the moratorium and approval of a secured loan from the municipality of The Hague.
On these matters, the court decided as follows:
- it extended the moratorium to 1 November 2021 on the basis that good progress was made in preparing the restructuring plan and that, according to the liquidity forecast, ADO Den Haag was able to meet its payment obligations through that date; and
- it denied authorization to enter into a secured loan with The Hague.
The court denied the club's request to enter into the secured loan with The Hague for various reasons. First, the court held that the parties were in an insufficiently advanced stage of negotiations as a result of which it was insufficiently clear when and under what circumstances the loan agreement would be concluded. Second, according to the liquidity forecast, ADO Den Haag did not require the full funding sought under the bridge facility. Third, the court ruled that according to ADO Den Haag's own statements in the draft loan agreement, approval of the facility was premature as it would only be necessary as of November 2021 and only if funding arrangements could not be agreed with an investor. Accordingly, the court held that the loan agreement was not shown to be necessary for ADO Den Haag to finance its business pending the preparation of a plan. The court, however, indicated that if in due time it were to become clear that the financing was indeed necessary after 1 November 2021 and that the statutory requirements were met, the club could re-submit a request to the court for authorization to enter into the loan with the municipality.
The restructuring plan
The restructuring expert proposed a restructuring plan in which the creditors and shareholders were divided into five separate classes: (i) class A consisted of the Dutch Tax Authorities as a preferential creditor; (ii) class B consisted of unsecured creditors; (iii) class C consisted of an intercompany creditor; (iv) class D consisted of a shareholder in its capacity as subordinated creditor; and (v) class E consisted of the shareholders as equity holders.
Under the plan, classes A and B would receive partial payment of their claim, classes C and D would be required to write-off their claims, and the shares held by the shareholders in class E would be revoked while a new investor would receive 100% of the newly issued shares as consideration for a capital contribution. Hence, the restructuring plan was used to implement a distressed M&A transaction.
On 1 December 2021, the restructuring expert submitted the draft restructuring plan to the various classes of creditors. None of the creditors or shareholders in these classes raised any objections to the draft plan.
Voting and confirmation hearing
The final plan was then submitted to the creditors and shareholders for a vote. Classes A, B, C and E voted in favour of the plan, class D abstained from voting.
Based on the outcome of the voting, the restructuring expert then submitted the plan to the court for confirmation. However, two parties came forward and raised objections to the confirmation. These parties were United Vansen International Sports Co. Ltd (UVS) (the sole creditor in class D and one of the shareholders in class E) and a creditor of UVS, which had levied a pre-judgment attachment on the UVS's shares in ADO Den Haag.
In respect of the latter, the court decided that, since the objecting entity was not a creditor of ADO Den Haag, it had no standing in the WHOA proceeding. The party argued that as an attachor in respect of the shares, it should be considered akin to a depository receipt holder (which may be given certain voting rights by the restructuring expert or debtor). The court, however, applied the statutory language strictly and rejected this argument.
In respect of UVS, the court ruled that UVS did not timely invoke any of the grounds for refusal of confirmation of the proposed restructuring plan, as (a) it did not timely raise objections when the draft restructuring plan was originally submitted on 1 December 2021 and (b) UVS did not vote against the plan, having abstained from voting. As a result, the court rejected UVS's objection to confirmation.
There are two main key takeaways from the ADO Den Haag restructuring.
First, creditors or shareholders that wish to prevent a restructuring plan from being confirmed must make their objections known to the restructuring expert (or debtor) as soon as possible. Taking a passive role in the negotiations, reviewing drafts of the plan and abstaining from voting will cause the court to dismiss objections made by the relevant creditors or shareholders at a later stage. This is a special feature in the Dutch scheme legislation whereby creditors and shareholders have an obligation to make their objections known as soon as possible, failing which they lose their right to object to confirmation of the restructuring plan.
Second, the court in this WHOA proceeding strictly applied the legislation around granting authorization for transactions in order to eliminate the claw-back risks on the basis of fraudulent conveyance. The restructuring expert (or debtor) should duly prepare the transaction documents with agreed form documents being available, explain in what manner the transaction serves to finance the business of the debtor pending the preparation of the plan and explain why the transaction is immediately necessary. Making sure that the above issues are addressed may raise the chances of success in seeking such authorization.
Although the Dutch scheme initially was used mainly by SME debtors, it has now been successfully used in large restructurings as well. The published case law relating to the two largest restructurings under the Dutch scheme provide helpful lessons learned and guidance for potential debtors, investors and creditors. The Dutch scheme has proven to work very well in large restructurings, and its many features contributed to getting these two restructurings over the line. The key takeaways are (i) preparation by the debtor or restructuring expert is critical and (ii) on the other side, creditors or shareholders must be engaged and proactive to avoid losing the opportunity to oppose to the confirmation of a plan.
The WHOA proceeding relating to the fitness centre chain was conducted before the Amsterdam district court, and the WHOA proceeding relating to ADO Den Haag was conducted before The Hague district court. Although these are separate courts, it is expected that the other district courts of the Netherlands will apply the legislation in the same manner, given that the judiciary has assembled an expert pool of WHOA judges who work closely together across the various district courts.