The Dutch Scheme of Arrangement
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At the time of writing, we are still in uncertain times as the covid-19 virus bears down on us. The economy has already received the first (and hopefully only) big blow. While it seems that the economy is slowly recovering from this first blow, it is difficult to predict the future impact of covid-19 on the Dutch, European and worldwide economy.
Before the covid-19 virus made its appearance, European legislators, including the Dutch, were already in the process of introducing new bankruptcy and restructuring laws in the hope that these would cushion the blow of the next recession. This recession has now occurred a lot faster than was envisaged. In light of the covid-19 virus, new restructuring legislation has become even more relevant and pressing.
In this chapter, we discuss the most conspicuous Dutch legislative proposal for restructuring: the draft bill on ‘court sanctioning private composition to avoid bankruptcy’ (WHOA). In our view, the WHOA has the potential for great relevance for both national and cross-border restructurings. Under the WHOA, a company remains in possession and may offer an extrajudicial restructuring plan to all or some of its creditors or shareholders. Creditors and shareholders may be divided in classes. The restructuring plan can be confirmed by the court, making it binding on all affected parties. The WHOA introduces the possibility of a cross-class cramdown as well as the possibility to amend (or terminate) onerous contracts.
Dutch scheme of arrangement (WHOA)
The WHOA introduces the possibility in the Netherlands for a company to obtain court confirmation of an extrajudicial restructuring plan. The Dutch Senate adopted the WHOA on 6 October 2020. This will most likely mean that the bill will enter into force on short notice, possibly still this year.
Offering a composition – by whom?
The WHOA can be used by companies that are or can reasonably be expected to become insolvent but have not yet filed for bankruptcy. The WHOA provides that the company itself can offer a composition to restructure its debts outside a bankruptcy proceeding, or to liquidate the company outside a bankruptcy proceeding.
Also, creditors, shareholders and a works council (if established) can initiate the launch of a composition by requesting the court to appoint a ‘restructuring expert’. The expert could subsequently offer – on behalf of the company – a composition to creditors and shareholders of the company. We discuss the restructuring expert in more detail below. It is not possible for creditors or shareholders to initiate a composition process themselves.
An important element of the Dutch scheme is that a company does not require the prior approval of shareholders before proposing a composition. A restructuring expert (if appointed) does not require any prior authorisation for proposing a composition either.
Offering a composition – to whom?
The composition can be offered to (a number of) creditors or shareholders, or both. Ordinary, preferred and secured creditors can be bound to the composition. Employee rights are, however, excluded.
The WHOA provides for the possibility to divide the creditors or shareholders into different classes. It is left up to the offeror of the composition to introduce tailor-made classes depending on the circumstances of the case, provided that:
- creditors or shareholders must be placed in different classes if they have, or as a result of the composition obtain, claims or rights, or both that reflect ‘incomparable positions’;
- creditors or shareholders that will have a different ranking in bankruptcy must be placed in different classes; and
- a separate class must be formed consisting of small trade creditors.
Creditors can also be placed in different classes for a same claim; for example, when part of the claim is secured (i.e., cross-holdings). Secured creditors will only be placed in a secured class for the amount that they would have realised in the case of a bankruptcy (i.e., liquidation value and not going-concern value applies). For the remainder of their claim, they will be placed into an unsecured class. Creditors can raise their concerns on the respective valuation with the company or the restructuring expert at any time prior to the voting, and, if relief is denied, request the court to reject the ratification.
We would typically expect separate classes for equity, secured creditors (if any), preferred creditors, trade creditors and general unsecured creditors.
A composition can also be used to compromise or release guarantees of group companies of the company without such companies themselves going through a WHOA process, provided that:
- the rights of the creditors against the relevant group companies entail payment of or security for the obligations of the company or obligations for which the legal entities are jointly liable with or alongside the company;
- it can reasonably be assumed that the relevant group companies will not be able to continue paying their debts as they fall due;
- the relevant group companies have approved the proposed compromise or release, or the plan is proposed by a restructuring expert;
- the Dutch court would have jurisdiction if these group companies were to offer their own composition under the scheme; and
- the relevant group companies have not already proposed a composition under the Dutch scheme process themselves by which the guarantees in question are compromised or released.
Content of the composition
The starting point is that the WHOA provides a high degree of flexibility as to the commercial content of the plan. Therefore, non-cash (e.g., warrants or shares) may be offered to creditors under the composition. In our view, in practice, the most frequently used approaches will be an extension or reduction, or both, of debt; a debt for equity swap; the sale of assets; or a controlled wind-down.
The WHOA also introduces the possibility for the company to make a proposal to amend contractual arrangements going forward. If the counterparty does not consent to the proposal, the company can choose to terminate the contract, subject to a notice period of three months and after obtaining court approval for the termination. The court will decide on the termination on the ratification hearing and the termination will not be granted if the composition is not ratified. The counterparty becomes entitled to damages suffered as a result of the termination. These damages can, however, be included in the composition.
While the WHOA provides the company with a lot of flexibility to design the composition as it deems fit, it does stipulate for some minimum requirements that a composition will have to meet.
An important element is that a creditor who would have received cash in a bankruptcy must also be given the choice to opt for the amount of cash it would have received in the bankruptcy. This is generally referred to as the ‘cash option’. This cash option does not apply to secured creditors that have granted the company financing on a commercial basis. Such secured creditors should also be given the right to opt for a different form of distribution than, for instance, shares, but do not need to be offered cash. That other form of distribution could be, for example, a deferral of payment or a loan. This element was added to the draft bill at the very last moment and has led to some debate among legal scholars as to how this will play out in practice.
Another important element is that the composition must essentially offer at least 20 per cent payment on claims of small to medium-sized enterprise creditors. The following criteria apply:
- a creditor either qualifies as a micro or small enterprise under the Dutch Civil Code or has fewer than 50 employees registered with the Dutch Chamber of Commerce; and
- the creditor has a claim on the company based on delivered goods or rendered services, or tort.
If the composition entails that these creditors will receive less than 20 per cent of their initial claim, the company will have to include an explanation as to why there is a compelling ground to pay these creditors less than 20 per cent of their claim.
When offering a composition, the plan should contain all information necessary for creditors or shareholders to form a reasoned opinion. Such information should, among other things, include:
- the financial consequences for creditors or shareholders;
- the value that is expected to be realised if the composition is accepted;
- the proceeds that will likely be realised if the company would be liquidated in an alternative bankruptcy proceeding; and
- any new financing arrangements the company intends to enter into so as to be able to give effect to the proposed composition.
In practice, we expect that this will require the submission of valuation reports, although this is not a legal requirement as such.
Voting and (cross-class) cramdown
The voting on the composition takes place per class. The voting can take place physically, in writing or electronically. Only shareholders and creditors whose rights are affected by the composition are entitled to vote. Where legal title is split from beneficial ownership, the beneficial owner is entitled to vote.
A class of creditors has approved the composition if creditors representing at least two-thirds of the amount of claims of participating creditors in that class vote in favour of the composition. A class of shareholders has approved the composition if at least two-thirds of the amount of the subscribed capital of participating shareholders in that class are in favour of the composition. There is no head count or quantity criteria.
If at least one class has voted in favour of the composition, the company can request the court to ratify the composition and declare it generally binding (i.e., also on dissenting creditors and shareholders).
The WHOA also introduces the possibility for the court to declare a composition generally binding even though not all classes have voted in favour of the composition (a cross-class cramdown). This is possible if at least one ‘in the money’ class has approved the composition. A class is ‘in the money’ when it consists of creditors whose claims would be expected to be at least partially satisfied in a liquidation of the company’s assets in bankruptcy.
Ratification by the court
The composition will be ratified by the court if the voting thresholds have been met and the company has satisfied the requirement of keeping the creditors and shareholders informed, unless certain non-limitative circumstances apply:
- it is not within reasonable expectations that the company will not be able to pay its debts;
- the performance of the composition by the company has not been sufficiently secured or guaranteed;
- the voting procedure was seriously defective;
- the company wishes to enter into new financing arrangements in relation to the composition, which are detrimental to the interests of the creditors;
- the approval of the composition has been reached by means of fraud, deceit or by favouring one or more ordinary creditors; or
- there are other reasons for not ratifying the composition.
In addition, the WHOA provides opposing creditors or shareholders who are part of a class that has voted against the composition with various options to protect their economic and other interests by requesting the court to reject ratification, for example, on the basis that:
- a dissenting class of creditors may not receive less under the composition than it would receive according to the ranking as catered for in the Dutch Civil Code or in contractual arrangements (if any), unless there are reasonable grounds to deviate from this ranking and the interests of the creditors in this class are not prejudiced (relative absolute priority rule). A reasonable ground to deviate from this ranking could be, for example, to provide the shareholder with part of the value as the shareholder is crucial for the company (e.g., management expertise) or if the shareholder is willing to bring new value on the table by providing additional equity; and
- a class of creditors may not lose the right under a composition to receive cash payments of at least the amount that they would have received in a bankruptcy scenario (‘no creditor worse off’ rule). This protection to receive cash out does not apply to secured creditors that have granted the company financing on a commercial basis.
The company and restructuring expert may request the court to render a decision on preliminary questions at an earlier stage before the voting takes place.
There is no appeal available against the ratification decision of the court, as finality and deal certainty are other elements of the Dutch scheme.
The restructuring expert
As already mentioned, a restructuring expert can be appointed by the court and initiate a composition process. The company can also request the court to appoint a restructuring expert. If desirable, a restructuring expert can also be appointed after the composition process has been started. Such appointment may be desirable if the independency of the board of the company is not beyond doubt.
The court has full discretion as to the identity of the restructuring expert and is not bound by a proposal from the requesting creditors or shareholders. We expect that the courts will in practice mostly appoint bankruptcy trustees, who in the Netherlands tend to be lawyers. Accountancy firms may also be eligible parties to fulfil the role as a restructuring expert.
Creditors may, at any time, request the court to dismiss or replace the restructuring expert. It is unclear under which circumstances such request would be granted. Our experience in bankruptcy cases is that requests to replace the bankruptcy trustee are in practice almost never granted. This is only different in cases where the trustee has, for example, committed fraud. We expect a similar regime to apply with regard to a dismissal or replacement of the restructuring expert.
The court has the ability to appoint an observer on its own initiative if it deems the appointment beneficial for the interests of the joint creditors and shareholders. An observer will:
- supervise the composition process with special attention to the interests of all creditors;
- assess the composition and inform the court of his or her findings in this regard; and
- inform the court if he or she is of the opinion that the company will not be able to successfully offer a composition or the interests of the creditors will be damaged.
An observer may only be appointed by the court if no restructuring expert has been appointed. If not all classes have voted in favour of the composition and no restructuring expert has been appointed, the court will always have to appoint an observer when it determines the date for the ratification hearing.
Private offering and public offering
The WHOA gives the offeror the opportunity to offer a composition in a private composition process or a public composition process. A public process will be made public by registering the process with the relevant Dutch public registers, while the private process will not be recorded in a public register. The offeror will have to assess which procedure has the most chance of success.
If a public composition process has been initiated, the jurisdiction rules as included in the Insolvency Regulation will determine whether the Dutch court has jurisdiction, and therefore the place of the centre of main interests of the company will in principle be decisive.
The private composition process is available to any company that has sufficient connection with the Netherlands (e.g., the existence of a Dutch branch or being part of an international group with Dutch group companies). A downside of the public process may be that creditors can, on the basis of the Insolvency Regulation, continue to enforce on their security rights held over assets outside the Netherlands.
The public composition process will be automatically recognised in the EU. The private composition process will not be recognised automatically. However, we expect that the private composition process will be recognised on the basis of local private international law and may (similar to the current practice for the English scheme of arrangement) be recognised under the Brussels II recast. We expect that recognition in the United States on the basis of Chapter 15 will also be possible.
Here, we discuss some other elements of the WHOA that we consider important. Not all of these topics are connected.
Ipso facto not enforceable
If a contract contains a clause that automatically terminates the contract or gives the other contract party the right to terminate or amend the contract if the company offers a composition (ipso facto clauses), such provision will be not applicable. The offering of a composition shall also not allow for the suspension of performance of obligations against the company. This enhances the chance of a successful WHOA process.
No automatic stay
While the WHOA does not cater for an automatic (worldwide) moratorium, the company may request the court to grant a moratorium against individual enforcement actions by creditors, including filings for involuntary (liquidation) bankruptcy or for a suspension of payments, for a maximum period of four months (with a possibility to extend for another four months). The court may attach certain conditions to a moratorium (e.g., the determination of the period in which the voting on the composition must take place).
Another important advantage of the WHOA is that it provides for a limited pool of judges who will be appointed in WHOA proceedings. Therefore, the involved judges will be specialised and will (most likely) be well placed to decide on the ratification of a composition.
Following the launch of the composition process, the company or the restructuring expert proposing the composition should allow a reasonable period (which should be at least eight days) before the voting date. Within seven days of the voting, the company prepares a report that includes, among other items, the outcome of the voting and whether the company will request ratification by the court. The ratification hearing will be held at least eight days and no more than 14 days after the request to ratify and the report on the vote has been made available at the court for inspection.
The ratification decision will follow as soon as possible (there is no strict deadline for the court, but we expect that it would typically be within one or two weeks).
We expect that the entire process from the launch of the proposal to the ratification decision by the court can be finalised within three to five weeks (subject to proper preparation).
Although it is not yet clear what the precise further impact of covid-19 will be on the Dutch, European and worldwide economy, our expectation is that relatively many (Dutch) businesses are facing challenging times. The WHOA, once it becomes enacted, has the potential to play a significant role in the restructuring of distressed (Dutch) entities and may avoid bankruptcies.
 Vincent Vroom and Loek Kerstens are attorneys at law at Loyens & Loeff N.V.