Netherlands

The Dutch government is currently working on a legislative programme that completely overhauls the existing Dutch business rescue culture. Two draft bills aim to bolster the restructuring options of debtors: the Continuity of Enterprises Act I, which intends to facilitate and provide a statutory basis for UK-style pre-packs; and the Act on the Confirmation of a Private Plan, which introduces a scheme-like instrument in the Netherlands (the Dutch scheme).[1] Both draft bills are discussed in this chapter. In particular, the introduction of the Dutch scheme has the ability to transform the restructuring landscape for both domestic and foreign debtors, and could become a viable alternative to the English scheme of arrangement and US Chapter 11 proceedings.

Pre-packs

Dutch law does not have a statutory basis for pre-packs; however, several courts have allowed companies to use pre-packs on a non-statutory basis. To facilitate the use of, and to provide a statutory basis for these pre-packs the legislature developed a draft bill. This bill has already been passed by Parliament and is currently pending in the Senate. The Act was adjourned in the Senate following the decision of the European Court of Justice in the Smallsteps case handed down in June 2017 (C-126/16) on the interpretation of EU Directive 2001/23/EC on the Transfer of Undertakings (Protection of Employment) (TUPE).

TUPE does not apply in the event of bankruptcy. The decision of the Court of Justice of the European Union in Smallsteps suggests that TUPE does apply in the Netherlands in the event of a business sale in bankruptcy if prepared and executed as a pre-pack. This has led many commentators to question the added value of the draft bill and the use of pre-packs in general as the applicability of TUPE would discourage potential buyers and could stifle any possible transaction. However, the government still sees the benefit of the draft bill, notwithstanding the Smallsteps judgment for situations in which TUPE does not play a role, and has requested the Senate to resume the process of adopting the bill. Simultaneously, the government is working on a separate draft bill that would make TUPE applicable in bankruptcy situations, but would allow the seller to terminate the employment contract before the transfer on economic, technical or organisational grounds entailing changes in the workforce. The precise contents of this separate draft bill on TUPE are not yet public. The draft bill is expected to be sent to Parliament in autumn 2019.

Dutch scheme

The draft bill for the Dutch scheme is planned to be submitted to Parliament in the second quarter of this year. This will be a revised version of the public draft that was published for consultation in September 2017.

Current situation

Currently, the law does not provide for an effective scheme-like restructuring mechanism. Debtors can offer a compulsory composition plan to their creditors as part of formal proceedings. Apart from the stigma that these proceedings carry, this procedure is rarely used as it only binds unsecured creditors, making it ineffective against shareholders or secured or preferential creditors. Out of formal insolvency proceedings, there is no statutory route to bind dissenting creditors to a restructuring plan.

The lack of an effective restructuring mechanism has meant that many Dutch companies have had to avail themselves of Chapter 11 proceedings and the UK scheme of arrangement to restructure their debts.[2]

Key characteristics

The new procedure can bind all types of creditors and shareholders or only a subset of them. It may also include third-party releases. The entire formal process can be completed within four to five weeks, during which time the debtor remains in possession.

The scheme combines elements from the UK scheme, such as the ability to implement a plan outside formal insolvency proceedings, with elements from Chapter 11, such as a cross-class cramdown mechanism and improves on both procedures. The result is a fast and flexible procedure that is designed to avoid unnecessary court involvement. To avoid the effects of negative publicity, the procedure remains confidential until the confirmation decision has been delivered. The procedure also allows for flanking measures, such as a temporary stay upon request and the ability to shed onerous contracts and to preserve valuable contracts by invalidating ipso facto and similar clauses.

Overview of the procedure

The debtor may simply propose a plan to its creditors and equity providers and solicit their votes. There is no convening hearing or court test at entry, nor is prior court approval of a disclosure statement required. A vote takes place at least eight days after a plan has been submitted. A formal hearing is not required. Within 14 days of this vote, a confirmation hearing takes place. The confirmation decision has to be handed down as soon as possible thereafter, and is final and binding. Appeal is excluded.

Proposing a plan

A debtor can propose a plan if it foresees that it will be unable to continue paying its debts as they fall due. Creditors, however, can also take the initiative and can request the court to appoint an expert. The expert will then have the right to propose a plan to the exclusion of the debtor.

Early determinations

To promote the efficiency of the process and to provide certainty as early in the process as possible, the proponent of the plan may request the court to issue binding determinations before the plan is put to vote on matters of uncertainty, such as jurisdiction, class formation and valuation.

The plan

The draft bill does not contain any detailed statutory prescriptions or restrictions as to the permitted commercial content of the plan. This allows the debtor a great deal of freedom when proposing the plan. It can include a wide variety of measures, such as extension or reduction of debt, a debt-for-equity swap or a sale of assets. The plan is binding for all types of creditors and shareholders, including secured and preferential creditors.

The debtor is also free to choose whom it proposes the plan to. It can decide only to include a subset of the creditors and shareholders. Only parties that are included or involved in the adoption of the plan are bound by its terms. The plan does not have to be limited to a principle debtor, but can also include third parties that are liable for debts of the debtor (such as guarantors).

The requirements that the plan does have to meet follow from the confirmation criteria. Creditors and shareholders need to be able to make an informed decision on the plan. They should therefore be notified of the proposed division in classes, the financial consequences of the plan for each class and a comparison between what they receive under the plan and what they would receive in bankruptcy.

Voting and class formation

Every creditor and shareholder whose rights are amended under the plan has the right to vote. Voting takes places in classes and the proposed division of classes is included in the plan. Creditors and shareholders that, based on their rights or interests or the rights they receive under the plan, cannot be said to be in a similar position, must be placed into different classes. Creditors or shareholders that have a different rank in bankruptcy must, in any event, be placed into different classes.

Creditors and shareholders can vote electronically. No formal meeting is required. If a group of creditors representing an amount of at least two-thirds of the total claims of those who have cast their vote within the class vote in favour of the plan, this class of creditors has accepted the plan. Similarly, a class of shareholders has accepted the plan if the shareholders who voted in favour represent at least two-thirds of the issued capital held by those who voted in that class. No head count applies.

Confirmation

The debtor can request the court to confirm the plan if at least one class of creditors has voted in favour of the plan. The court will schedule a confirmation hearing within 14 days of the filing of the request. The court’s decision must follow as soon as possible after the hearing. This decision is not subject to appeal in the interest of finality and speed.

Before confirming the plan, the court tests whether it meets the confirmation criteria. These criteria are stricter if one or more classes have not accepted the plan (cramdown) than if there is a consensual plan in which all classes (but not all individual creditors) voted in favour.

The main economic requirement for confirmation of a consensual plan is that individual creditors under the plan receive rights with a value that is not materially lower than the amount that they would have expectedly received upon liquidation in bankruptcy.

For a cramdown, the main economic requirements are inspired by Chapter 11 procedure and include the absolute priority rule. These criteria aim to ensure that creditors in a dissenting class receive their share of the reorganisation value in accordance with their rank. To protect senior creditors’ exit rights, creditors must also have the right under the plan to opt for a distribution in cash equal to their share in accordance with their rank of the liquidation value. Unlike the US system, under the proposed Dutch bill, creditors in a dissenting class cannot be forced to continue financing the business against their majority will on terms imposed by the court. If a senior class dissents, it must have the right to be ‘cashed-out’.

Flanking measures

The draft bill provides for a number of flanking measures to enable the debtor to successfully implement the plan. The draft bill provides for a stay of up to four months. The stay is not granted automatically, as in Chapter 11, but only upon the request of the debtor. The stay can be directed against an individual creditor seeking to enforce its claim or against the creditors generally.

The draft bill contains provisions that enable the debtor to preserve valuable contracts and to shed onerous ones. Ipso facto and change of control provisions are rendered inoperative. The debtor may terminate onerous contracts by written notice. The contracting party receives a damages claim for non-performance, which can be subsequently restructured under the terms of the plan.

The draft bill further contains a provision that stimulates emergency funding by protecting security granted for such funding against clawback actions.

International aspects

The consultation version of the draft bill does not yet determine whether the Dutch scheme will or will not be included in the scope of the EU Insolvency Regulation. There are advantages and disadvantages to both. Inclusion in the Insolvency Regulation has the benefit of automatic recognition in other member states (except Denmark); however, it also means that the procedure could only be used for debtors with their centre of main interests (COMI) in the Netherlands. If the scheme is covered by the Insolvency Regulation, it would render a restructuring plan ineffective against creditors with security rights over assets located abroad and would render third-party releases ineffective where the third party has its COMI in another member state.[3] This makes it difficult if not impossible to restructure cross-border groups.

Conversely, if the scheme falls outside the scope of the Insolvency Regulation, it could – similarly to the UK scheme of arrangement – also be applied to debtors, assets and third parties located or having their COMI outside the Netherlands. The scheme would, in that case, however, not benefit from automatic recognition under the Insolvency Regulation. As it is also unlikely that the scheme would be included in the scope of the Brussels I Regulation, recognition of the plan would depend on the domestic private international law of each individual member state where the debtor has assets.

For the above reasons, the nature of the situation will determine whether it is preferable to have the scheme fall inside or outside the scope of the Insolvency Regulation. This is one of the reasons that the Ministry of Justice is contemplating a dual-track system whereby the debtor has the ability to choose between a public or a confidential procedure. This choice directly influences whether or not the procedure falls under the scope of the Insolvency Regulation, as the recast of the Insolvency Regulation only applies to public insolvency proceedings.[4]

Netherlands Commercial Court

It is hoped that the jurisdiction of the Netherlands Commercial Court (NCC) will be expanded in the future so that it has jurisdiction to deal with Dutch scheme proceedings in international cases.

Conclusion

The adoption of the draft bills for a Dutch pre-pack and Dutch scheme would dramatically increase the options for business rescue in the Netherlands. The bill for the statutory introduction of a pre-pack avoids unnecessary loss of value in business sales through insolvency, and the introduction of the Dutch scheme will give debtors an effective option to restructure their debts. The Dutch scheme combines the best elements of the scheme of arrangement and Chapter 11 procedure, while improving on both by being faster, more flexible and more effective. The result is a modern and flexible restructuring procedure with minimal court involvement, but that includes cross-class cramdown and the necessary flanking measures. It is probable that the Dutch scheme will also offer greater flexibility in cross-border situations, by giving the option to be used both within and outside the scope of the EU Insolvency Regulation. This would add to its appeal. The expectations are therefore high.


Notes

[1] The official Dutch text of the draft bill on the Dutch scheme and the explanatory notes on it can be found on the website of the Dutch government: https://www.internetconsultatie.nl/wethomologatie. An unofficial English translation of the draft bill can be found on RESOR’s website: http://www.resor.nl/.

[2] Examples of Dutch companies turning to the scheme of arrangement include Magyar Telecom BV (Re Magyar Telecom BV (2013) EWHC 3800 (Ch.), Van Gansewinkel Groep BV (Re Van Gansewinkel Groep BV [2015] EWHC 2151 (Ch) (Snowden J, 22 July 2015)) and Indah Kiat International Finance Company BV (Re Indah Kiat International Finance Company BV [2016] EWHC 246 (Ch)). Examples of Dutch companies using the Chapter 11 procedure include: Almatis BV (Re Almatis BV et al, Case No. 10-12308-mg, in the US Bankruptcy Court for the Southern District of New York), Versatel Telecom International NV (Re Versatel Telecom International NV, Case No. 02-13003 (RDD), in the US Bankruptcy Court for the Southern District of New York) and Global Telesystems Europe BV (Re Global Telesystems Europe BV, Case No. 01-11280 (EIK) in the US Bankruptcy Court for the District of Delaware).

[3] European Court of Justice 15 December 2011, ECLI:EU:C:2011:838, Case C-191/10 (Rastelli Davide e C Snc v Jean-Charles Hidoux).

[4] Article 1 of the EU Insolvency Regulation (recast).

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