Update 4 November 2020: Approved Restructuring Plan Act will be enacted
On 1 January 2021 the Court Approved Restructuring Plan Act will be enacted (in Dutch: Wet Homologatie Onderhands Akkoord, or ‘WHOA’). The WHOA is also known as the “Dutch Scheme”. The introduction of the Dutch Scheme is the final piece of a long legislative process, and an important development in the Dutch insolvency practice. Moreover, it is a development that the practice is eagerly awaiting, also in the light of the economic consequences of the corona crisis.
Purpose and structure of the Dutch Scheme
The objective of the Dutch Scheme is to improve the ability of companies to reorganize by being able to offer a restructuring plan to creditors. The Dutch Scheme makes it possible for a private composition outside bankruptcy to be ratified (approved) by the court, making it binding on creditors, including those who voted against (or not at all). This is also called a ‘cramdown’ of the creditors.
In the Netherlands, it is currently virtually impossible to force a creditor, or a group of creditors, to accept a composition outside bankruptcy. In fact, a debtor has to get all his creditors on board in order to be able to restructure effectively. Practice shows that this is virtually impossible, causing many companies to go bankrupt unnecessarily. The objective of the Dutch Scheme is therefore to protect companies that are fundamentally viable and profitable from this, to make it easier to restructure companies and thus to preserve value of capital and employment. The idea is that a company’s going concern has more value for all creditors than its bankruptcy.
Possibilities of the Dutch Scheme
In order to achieve this objective, the Dutch Scheme introduces this new restructuring tool into the Dutch insolvency practice. Restructuring procedures of this kind have been in place in other jurisdictions for some time, such as Chapter 11 in the US and the scheme of arrangement in the UK. The Dutch Scheme is also strongly inspired by these examples.
The question then is; how do you shape a restructuring plan, and what are the requirements to subsequently have such a restructuring plan approved by the court?
Content and consequences of the restructuring plan
In principle, the debtor is free to determine the content of the composition and the amendment of his creditors' rights, on the understanding that employment agreements are excluded.
The debtor may, when offering the plan, classify creditors who are very different in different ‘classes’ of creditors. Examples include (unsecured) trade creditors, (secured) financiers, the tax authorities with a priority right, shareholders, etc. The Dutch Scheme offers a debtor the freedom to offer a composition to one or more classes of creditors, and not to other creditors. The other creditors will then retain their claims.
It is also important that the debtor (or the restructuring expert when appointed) has the power to unilaterally terminate agreements as part of the composition, although being held to compensate for damages as part of the plan. It is furthermore important that banks can lend new money to the debtor under the composition and can establish security rights for it. Under current law, the provision of securities for new loans will in almost all cases be regarded as prejudicial to creditors. This is therefore a legal exception to this concept.
Voting and approval
After being offered a restructuring plan, creditors must vote per class whether they can agree to the proposal. If this is (partly) the case, the composition may be submitted to the court for approval. For approval, a composition must meet the following conditions:
- The composition is necessary – without a composition it is to be expected that bankruptcy will follow, while the company is fundamentally profitable;
- The composition is feasible – the restructuring is a well thought-out plan with a chance of success;
- At least one class of creditors representing at least 2/3 of the value of the debts have accepted the proposal;
- The composition will not put any of the classes of creditors concerned in a less favourable position than in a bankruptcy; and
- the ‘value’ of the composition, consisting of the added value created or maintained in relation to a bankruptcy scenario, is divided proportionally between the creditors concerned.
If the plan satisfies these conditions, the court will in principle approve it and it will become compulsory vis-à-vis the classes of creditors concerned. The court will refuse it if one of the grounds for refusal mentioned in the law is involved, such as fraud or other compelling reasons opposing approval. The court plays an important role here. A further point of attention is that there is no possibility for prejudiced creditors to appeal against an approval that has been given. The court's ruling makes the composition a fact and the restructuring can be carried out.
Special adjustments for small creditors and banks
At the initiative of a number of political parties, three amendments to the law were adopted:
- SMEs (in accordance with Sections 2:395a/2:396 of the Dutch Civil Code or fewer than 50 employees) will receive at least 20% of their claim for goods or services supplied, or pursuant to an unlawful act, unless there are compelling grounds for not doing so.
- Banks are only placed in the class of secured creditors with regard to their claim to the extent that their claim has been secured based on the value represented by the security, and for the rest they are in the class of unsecured creditors. Leading in this respect is the liquidation value of the secured assets.
- The rule that court approval may be refused at the request of a dissenting creditor who is in a class that has not agreed to the proposal when that creditor has not been offered cash, does not apply to secured banks. They must, for example, be satisfied with the continuation of a loan on market conditions.
The 20% rule mentioned above does not concern:
- parties who have bought up claims for less than 20% of the value;
- financiers with an unsecured subordinated loan,
- legal entities within the group which provide mutual financing;
- shareholders who also have an unsecured claim on the debtor, and
- bondholders.
To conclude
If you foresee that your company cannot go on with paying its ongoing obligations, and you are considering a restructuring of debts or a liquidation of the company, the Dutch Scheme can be an adequate solution. The Dutch Scheme provides for a balanced procedure to obtain an arrangement with all or part of the creditors. An important advantage of the Dutch Scheme is that a bankruptcy and the appointment of a receiver can be prevented. You will remain in control – at least to a large extend – over the process.
Do you have questions about the Dutch Scheme or other insolvency and restructuring issues? Please contact our specialists Bart de Man, Eva Jagt or Jeroen Postma.
