Both a debt restructuring procedure under the widely known Chapter 11 of the U.S. Bankruptcy Code and the Dutch Scheme (Wet Homologatie Onderhands Akkoord, or 'WHOA') are legal frameworks for an international group to reduce debts or excessive structural costs while continuing operations, preventing insolvency of individual group companies in various jurisdictions.
Why combine these two restructuring proceedings?
Opting for parallel restructuring procedures can be a compelling strategy to safeguard the value of an international group with substantial assets, major creditors, or financing in both the United States and the Netherlands.
A notable advantage arises when a Dutch- and a US holding company simultaneously establish a debt restructuring plan under the flexible Dutch Scheme proceedings and the well-established U.S. Chapter 11 proceedings with its affected creditors. Upon approval of the plans by the respective court, the group's creditors located in the Netherlands, other EU member states, and the United States will be automatically bound by the plan's effects, regardless of their position on the plan. The options for group debt restructuring within the framework of these restructuring laws in parallel are extensive.
Considerations prior to opting parallel restructuring proceedings
Before adopting a parallel restructuring approach, the group and its advisors should consider, among others, the following (Dutch law) matters.
Proceedings will be conducted publicly
By initiating parallel restructuring proceedings, the group discloses its preliminary debt position to its stakeholders and other third parties as per U.S. bankruptcy law, which provides that a Chapter 11 proceeding must be conducted collectively and publicly. This is in contrast to the Dutch Scheme, which offers the option of establishing a plan through either a public- or private procedure.[1] Given that stakeholders will be informed about the Chapter 11 proceedings anyway, opting for a Dutch Scheme proceedings in a public manner becomes a logical step for the group. Consequently, its Dutch Scheme proceedings is documented in the Dutch ‘WHOA register’, and applications and court judgments are publicly accessible. Although this public route may not be immediately apparent, there is an inherent advantage to opting for public proceedings under the Dutch Scheme, in particular due to recognition of the plan in the EU.
Jurisdiction Dutch Court, recognition and enforcement of the Dutch Scheme plan in the EU
If the company initiating the public Dutch Scheme procedure on behalf of the group has its statutory seat or habitual residence (its "centre of interest" or "COMI"[2]) in the Netherlands, the Dutch court has jurisdiction over any applications related to the Dutch Scheme under the EU Insolvency Regulation (Recast). Therefore, approval of the Dutch scheme of the group by a Dutch court result in recognition and enforceability of the Dutch Scheme plan directly in all EU member states.[3] This entails that affected creditors in EU member states are bound to the effects of the Dutch Scheme plan, without the requirement of any additional court proceedings.
Jurisdiction Dutch Court, recognition and enforcement of the Dutch Scheme plan in the United States
The recognition and enforceability of a Dutch court-approved plan in the United States following a public Dutch Scheme proceedings depend on U.S. private international insolvency laws and are determined on a case-by-case basis.
If a Dutch Scheme public proceedings is recognized as a "foreign main proceeding" under the UNCITRAL Model Law on Cross-Border Insolvency (MLCBI) and Chapter 15 of the U.S. Bankruptcy Code, it facilitates the enforceability of a Dutch Scheme plan in the United States.
Recently, the Dutch Scheme was recognized as a foreign main proceeding by a U.S. Bankruptcy Court in judgments of the Southern District of Texas in two separate matters:
- On July 12, 2023, the Diebold Nixdorf Group's public Dutch Scheme proceedings were recognized as "foreign main proceedings" under Chapter 15, ultimately resulting in a restructuring of debts by approximately USD 2.1 billion through approved restructuring plans in both the Netherlands and the United States.[4]
- On October 10, 2023, the McDermott Group's public Dutch Scheme proceeding was recognized as a "foreign main proceeding" under provisional relief obtained under Chapter 15. This group, having previously restructured its debts through a U.S. Chapter 11 proceeding, is concurrently restructuring its debts with an English law scheme of arrangement plan.[5]
These precedents suggest that future Dutch Scheme public proceedings may be recognized as "foreign main proceedings" under Chapter 15 of the U.S. Bankruptcy Code, binding U.S.-based creditors to the effects of a Dutch Scheme restructuring plan.
Before a U.S. Bankruptcy Court approved Chapter 11 plan can be enforced in the Netherlands, the Dutch court will have to assess whether it recognizes the Chapter 11 proceedings. We are not aware of any cases in which the Dutch court has refused to recognize Chapter 11 proceedings and thus the Chapter 11 plan approved by the U.S. Bankruptcy Court.
Content of restructuring plans
Drafting and negotiating the plans with the group’s creditors will involve a close interconnection between the restructuring plans under the Dutch Scheme and Chapter 11 proceedings. The inclusion of court approval and the binding nature of one plan may be a condition for implementing the other plan.[6]
In addition, both plans must, among other things, ensure that creditors with lower-ranking claims are not entitled to any payment of their claims unless each higher-ranking class of creditors has received a full recovery (the absolute priority principle).[7] Deviation from this rule is possible where it has been legitimated by a majority vote within the higher-ranking classes to give preferential treatment to the lower ranking classes in the plan.[8] The Dutch Scheme, however, also allows for deviations where there is a ‘reasonable justification’.[9]
Court and creditor involvement during proceedings
The Chapter 11 proceeding is known to be characterized by significant involvement of the U.S. Bankruptcy Court.[10] The court is furthermore granted a considerate amount of discretionary power to issue any order, process, or instruction that it deems necessary under the Chapter 11 proceeding.[11] Contrastingly, in Dutch Scheme proceedings, the Dutch court's involvement may be limited to the application by the debtor for confirmation of the Dutch Scheme restructuring plan.[12] Examples of earlier court’s involvement include an application of the appointment of an independent restructuring expert or observer, the announcement of a stay- or moratorium period, or a preliminary assessment of an important aspect in relation to the realization of the restructuring plan.[13]
In addition, creditors' committees can play a major role in Chapter 11 proceedings. These committees are appointed by the U.S. trustee and ordinarily consists of unsecured creditors who hold the seven largest unsecured claims against the debtor.[14] The Dutch Scheme is considered less litigious, now that creditors have limited opportunities to contest certain aspects of the proceedings. The Dutch Scheme does not offer the possibility of instituting creditors' committees. Moreover, if creditors identify issues for the Dutch court to decide, they must first notify the debtor. If disputes remain, creditors can request the court to appoint a restructuring expert.[15] Alternatively, objections can be raised during the confirmation phase by the creditors.[16]
Case law and expertise
Many groups have utilized Chapter 11 proceedings for restructuring its debts, resulting in well-established case law, and thus U.S. Bankruptcy Courts possess extensive expertise in these proceedings. In contrast, the Dutch Scheme – in force since 2021 - is still evolving. To ensure a thorough evaluation of proposed plans, a nationally appointed task force, comprising insolvency judges and court-appointed professionals from diverse districts in the Netherlands, has been established. Moreover, ongoing court cases contribute to shaping the legal framework, creating precedents that will impact future proceedings.
Cost efficiency
Dutch Scheme proceedings require fundamentally less judicial oversight and fewer administrative obligations than the Chapter 11 proceedings, and are far less litigious than the other known restructuring schemes. [17] This leads to very cost efficient proceedings.
One strike or you are out
The Dutch Scheme does not allow a debtor, whose plan has been court-rejected in the past three years, from initiating a second proceedings, unless led by an independent court-appointed restructuring expert. Obtaining adequate legal advice is therefore essential for effective pursuit of these proceedings.
Would you like to discuss or collaborate?
At Kennedy Van der Laan, our WHOA lawyers assist Dutch and international clients, as well as non-Dutch legal advisors, in achieving optimal and efficient restructuring. Would you like to know more about the Dutch Scheme or are you interested in obtaining our advice regarding initiating a Dutch Scheme proceeding or parallel proceedings, please contact Bart de Man, Jeroen Postma, or Marleen Anneveld.
Footnotes:
- [1] Section 369(6) of the Dutch Bankruptcy Act.
- [2] COMI is a term used in Section 3(1) of the Regulation (EU) 2015/848 of the European Parliament and the Council of 20 May 2015 on insolvency proceedings (recast) (“the EU Insolvency Regulation (Recast)”), which determines the reciprocal recognition and enforcement of judgments in civil and commercial matters between EU Member States. It refers to "the centre of main interests shall be the place where the debtor conducts the administration of its interests on a regular basis and which is ascertainable by third parties".
- [3] Denmark is an exception, as it has opted out from the EU Insolvency Regulation (Recast).
- [4] In re Diebold Nixdorf Dutch Holding B.V., No. 23-90729, (Bankr. S.D. Texas, Houston Div., July 12, 2023), and District Court Amsterdam 2 August 2023, ECLI:NL:RBAMS:2023:6160.
- [5] In re CB&I UK Ltd., No. 23-90795, (Bankr. S.D. Texas, Houston Div., October 10, 2023).
- [6] District Court Amsterdam 2 August 2023, ECLI:NL:RBAMS:2023:6160.
- [7] Mennens 2020, page. 103-104.
- [8] Mennens 2020, page. 182-183.
- [9] Mennens 2020, page. 182.
- [10] Warren 2008, p. 23-26.; 11 U.S. Code § 363(c)(1); 11 U.S. Code § 1125 BC; 11 U.S. Code § 1129(a) BC
- [11] §105(a) BC.
- [12] Parliamentary Papers II 2018/19, 35 249, no. 3, page 6.
- [13] Section 371 Fw Section 376 of the Dutch Bankruptcy Act.
- [14] 11 U.S. Code § 1102.
- [15] Section 371(1) of the Dutch Bankruptcy Act.
- [16] Section 383(8) and (9) of the Dutch Bankruptcy Act.
- [17] Ilse van Vloten 2020, page 30.
