Restructuring Debts Without Bankruptcy; the WHOA as a Tool for Hotel Keepers

In recent years, the hotel business has been facing growing financial challenges. Hotels are confronted with rising rental and energy costs and a tight labour market. As a result, margins are coming under pressure.

For hotels that are part of (international) chains or franchise constructions, these challenges may add to complexity. In such situations, restructuring law may offer a way out to overcome financial hurdles.

In this article we will discuss the structure within (international) hotel chains and ways for them to strengthen and keep their financial position. We will go into the role that restructuring law plays – more specifically the Court Approval of a Private Composition Act (also known as the “WHOA”) – as an interesting instrument for sustainable solutions.

Hotel companies usually operate within a stratified legal structure that includes several legal entities. This structure is not only relevant for the operational organisation, but also plays a role in restructuring operations. Examples are parties such as:

• the operator (usually the franchisee or a management party). This party is responsible for the hotel's daily operations and concludes contracts with, among others, the franchisor, the property owner, and staff;
• the franchisor, who usually operates the (international) brand and grants the right to use the formula. He sets demands on quality, brand image and management; and
• the property owner, who owns the hotel building and lets it to the operator.

The above-mentioned parties are connected to each other via various contracts, such as management, franchise and lease contracts. This structure enables hotel operators to provide their services on a large scale and across borders. Hotel operators usually also have a variety of other external contractual obligations, e.g. with financiers, suppliers, IT service providers and staff.

When a debt restructuring operation is necessary – for example if the short-term debt burden is too high – it is important to have and keep a clear picture of these contractual relations.

Besides the benefits of interconnection and a stratified structure within a hotel chain, such as brand recognition and operational efficiency, there may also be risks. If a hotel operator is struggling with a too high debt burden, a lack of cooperation of one or more key parties (e.g. a franchisor or a property owner) may seriously complicate a restructuring of the debts. Restructuring operations outside formal insolvency proceedings often come with the challenge to reconcile the interests of the various parties involved. This is where the WHOA may come in handy to arrive at a workable solution, in which the business can be stabilised outside bankruptcy. 

The WHOA may be the big stick in this context. The prospect of achieving a formal WHOA composition with creditors and shareholders – which the court may approve under statutory conditions as a compulsory composition – can induce parties to cooperate in a solution outside bankruptcy. A successful WHOA composition makes it possible for a hotel operator who is operationally healthy but whose debt burden is too high to relieve financial pressure, and thus retain both the hotel operation and the brand.

The WHOA offers several instruments for the actual realisation of a (compulsory) composition for debt restructuring. An important instrument is the moratorium, which may apply for a maximum of eight months.

During this period, the board of the hotel operator remains in control, as opposed to the classic bankruptcy in which a trustee is appointed. The procedure begins with a simple start-of-procedure declaration to the court, which marks the formal start of the process. The operator and its advisors will then draft a restructuring agreement for the creditors and shareholders concerned. In this agreement, it is proposed to pay a certain percentage of the outstanding liabilities, which percentage is always higher than in a bankruptcy distribution scenario. If a sufficient number of creditors and classes agree to the composition, the court can approve it. This can even be done against the will of a minority, which will make it a compulsory composition.

This procedure has several advantages: retaining the value of the enterprise of the hotel operator and the employment of staff, and limiting damage to reputation.

In hotel chains, loyalty programs and international brand standards play a big role in guest loyalty and brand value. The operator is often a member of an (international) chain with associated franchise contracts, central booking systems and loyalty programs. These elements may be legally complex and may not always automatically fall within the scope of the WHOA. They may also be (partly) dependant on a foreign legal system that is applicable. These elements may be affected by a WHOA composition, for example if the operator wishes to change or terminate existing contractual obligations; but this wish is not always there. It is a good idea to examine in time which international arrangements are in place and whether any additional procedures – such as a foreign composition via a parallel scheme – are necessary in order to make a WHOA composition work effectively in the Netherlands.

As opposed to franchisees, who are often bound by international brand standards and central systems, independent hotels usually have more freedom to negotiate and fewer contractual limitations. This autonomy also allows timely intervention to safeguard the continuity of the enterprise via a WHOA composition.

The WHOA offers hotel operators a powerful legal instrument to intervene in good time if there are financial problems, in order to avoid bankruptcy. Especially in a sector where brand value, continuity of operations and customer confidence are crucial, a well-organized restructuring operation via the WHOA can make the difference. Independent hotels have no obstacles to take quick action, whereas franchise hotels must pay extra attention to international contractual relations. In any case, it is wise to take stock at an early stage and to operate in a legally strategic way so that you can keep your value and secure your future resistance.