On 1 January 2021, the Court Approved Restructuring Plan Act (in Dutch: Wet Homologatie Onderhands Akkoord or ‘WHOA’) entered into force. The WHOA is also known as the ‘Dutch Scheme’. The Dutch Scheme provides a debtor with several tools to reach a private (compulsory) composition with its creditors outside a formal bankruptcy proceeding, pursuant to the approval of the court (you can find more information about the purpose, content and consequences of the Dutch Scheme in this article). In addition, the Dutch Scheme introduces a major change for ipso facto clauses in reciprocal agreements. Ipso facto clauses, depending on their wording, are triggered if a debtor becomes insolvent or a composition is offered on a debtor's behalf.
What is an ipso facto clause?
An ipso facto clause allows a party to an agreement to terminate this agreement unilaterally, or the agreement in question may even be terminated by operation of law, due to bankruptcy, another insolvency-related situation (such as the offering of a composition to creditors) or the (poor) financial condition of the other party.
The ipso facto clause before the Dutch Scheme
It is a common and accepted practice to be ahead of possible insolvency risks during the process of concluding an agreement. An ipso facto clause is therefore often included in the general terms and conditions, or is laid down by the contracting parties in the agreement itself, usually in the article that deals with the termination of the agreement.
Before the implementation of the Dutch Scheme, when a creditor had invoked an ipso facto clause, a debtor might have challenged this by pleading abuse of a right (Section 3:13 of the Dutch Civil Code (‘DCC’)), or a debtor might have argued that the clause should be set aside, because its application was unacceptable according to the standards of reasonableness and fairness (Section 6:248(2) DCC). Such arguments, however, are generally not easily accepted.
Changes under the Dutch Scheme
As of 1 January 2021, the ability of creditors to invoke an ipso facto clause against a debtor has been restricted. This has been included in Section 373(3) of the Dutch Bankruptcy Act (‘DBA’). Since said date, preparing and offering a composition or appointing a restructuring expert (as specified in the Dutch Scheme) can no longer serve as a ground for a creditor to amend or suspend the obligations and commitments under an agreement or to dissolve the agreement in its entirety. This means that, as a rule, a creditor will have to tolerate that a debtor prepares a composition procedure (as specified in the Dutch Scheme), without being able to terminate or otherwise amend the agreement on that ground.
In addition, during the composition procedure, the court may declare a cooling-off period of four months maximum at the request of the debtor or the restructuring expert and, if requested, extend this period by another four months to eight months. In that case, too, ipso facto clauses remain without effect (see hereafter). During a cooling-off period, creditors cannot use default on the part of the debtor prior to the declaration of the cooling-off period as a ground for amending the agreement. Furthermore, during the cooling-off period, it is not possible for creditors to suspend the performance of an obligation towards the debtor or to dissolve an agreement with the debtor on above mentioned ground. However, security needs to be provided for the obligations that arise during the cooling-off period. The foregoing is included in Section 373(4) DBA.
Scope of the new regulation
The scope of the section of the Dutch Scheme relating to ipso facto clauses is broad and offers a debtor a lot of protection. This is because the section applies to all creditors. Thus, its application does not depend on whether or not the creditors concerned fall under the composition or the cooling-off period. In addition, a debtor is not only protected against clauses that attach (legal) consequences to the preparation and offering of a composition, but also against clauses relating to events and acts that are directly associated therewith or to the execution of a composition or that are reasonably necessary for that purpose. Thus, the provisions mentioned in the Dutch Scheme that are available to the debtor or the restructuring expert, such as the declaration of a cooling-off period, are also covered.
Legislative history further shows that Section 373(3) DBA also has the consequence that a composition in the form of a debt for equity swap cannot be hindered by change of control provisions. These provisions can lead to termination of the agreement in the event the direct or indirect control over or ownership of the contracting entities changes. Finally, the subsection also prevents the early invocation of the consequences of default (Section 6:80 DCC) on the grounds mentioned above1. Given the wide scope of the subsection, it is not likely that creditors will still be able to achieve the objective pursued by including an ipso facto clause through a detour.
The above, however, does not mean that creditors cannot take action (other than during a cooling-off period) in the event of a breach of an agreement. In such case, the counterparty of a debtor who is preparing a composition under the Dutch Scheme may still terminate the agreement, provided that the statutory and/or contractual conditions for termination have been met.
Conclusion
Before the implementation of the Dutch Scheme, ipso facto clauses could cause agreements essential for the survival of a company to be lost or could cause obligations under an agreement to be changed to the detriment of the debtor in question. This could happen, depending on the wording of the clause, even if there was no breach of contract. The Dutch Scheme ensures that such clauses remain ineffective during the composition procedure, so that a restructuring for the benefit of the debtor is not automatically doomed to fail. Parties should be aware of the fact that ipso facto clauses will not always have the effect they had in mind when they agreed to them and should carefully consider the risks thereof. On the other hand, the new regulation ensures that debtors have a better chance of a successful restructuring, which will be beneficial to all parties involved.
Do you have questions about the Dutch Scheme or other restructuring issues? Please contact one of our specialists: Bart de Man, Jeroen Postma, Eva Jagt, Anne Meijer and Marleen Anneveld.
