Senate approves new restructuring tool in the Netherlands: WHOA!

The Senate (Eerste Kamer) has approved the Dutch Act on Court Confirmation of Extrajudicial Restructuring Plans (Wet homologatie onderhands akkoord, or "WHOA"). The decision follows the adoption of the WHOA by Parliament (Tweede Kamer) on 26 May 2020. It is expected that the WHOA enters into force before 1 January 2021, although some suggest it could be sooner.

The WHOA introduces the possibility of a debt restructuring plan outside formal bankruptcy proceedings (a scheme of arrangement / (onderhands (dwang)akkoord), hereafter "Scheme") with creditors and shareholders. If approved by the court, the Scheme can be binding on all creditors, potentially leading to a horizontal cram-down or cross-class cram down. The aim and expectation of the WHOA is that unnecessary bankruptcies of viable businesses can be prevented.

Parliament already approved three late amendments to the WHOA. Below we briefly highlight (i) the latest amendments to the WHOA and (ii) the key elements of the WHOA.

Amendments to the WHOA

Minimum payment of 20% for SME creditors

Small enterprises / creditors (that provided goods or services) will be in a separate class of creditors if the Scheme envisages that less than 20% of their claims will be paid. The Scheme must then also contain compelling arguments (zwaarwegende gronden) as to why the small enterprises / creditors are offered less than 20%. Finally, if the debtor requests the court to approve the Scheme while not every class has voted in favour of the scheme, the court must reject the Scheme upon request of a small enterprise / creditor if the class of small enterprises / creditors receives less than 20% and there are no compelling arguments that justify the lower distribution amount.

Secured creditors will be part of an 'unsecured' and 'secured' class

The WHOA now provides that secured creditors' claims will be split; the part of the claim that is covered by security will be part of the class of secured / preferred creditors; the "unsecured" part (i.e. the expected remainder of the claim after a hypothetical security enforcement in bankruptcy) will be part of the class of unsecured / ordinary creditors. The background of this amendment is that unsecured creditors should benefit from any 'restructuring surplus' that can be achieved by keeping the debtor 'going concern' instead of pursuing a liquidation.

Exemption of secured creditors to request a cash payment

As set out below under 'Approval', non-consenting creditors in a non-consenting class can request the court to withhold approval of the Scheme if they are not offered a cash payment equal to the amount they would have received in bankruptcy of the debtor. Following the amendment, this ground for rejection is not available for secured creditors.

Key elements of the WHOA

Initiating a Scheme

By the debtor

A debtor can opt for a Scheme, if it is reasonably expected that he cannot continue to pay its due and payable debts. This pre-insolvency test entails that, although the debtor can still fulfil its current payment obligations, it is the reasonable expectation that, without a restructuring of the debtor's debts, the avoidance of a bankruptcy will not be realistic. A debtor can prepare a Scheme, but he may also request the court to appoint a restructuring expert (herstructureringsdeskundige) to assist preparing the Scheme.

By others

A Scheme can also be proposed by creditors, shareholders or the works council of the debtor, and each of them can also request the appointment of a restructuring expert.

The procedure of preparing and proposing a Scheme can be either 'public' or 'restricted'. Restricted procedures, contrary to a public procedure, take place in a closed court session. The public procedure will, furthermore, be published in the insolvency register, the Government Gazette (Staatscourant) and the trade registry. The choice between a 'public' or 'restricted' procedure will also have an impact on the cross-border recognition (see the final paragraph).

The Scheme

The WHOA provides for a wide variety of restructuring options, such as postponing payment obligations, the partial release of payment obligations or amending loan facilities or debt for equity swaps. It is at the debtor's discretion to decide to which creditors he offers a Scheme and how he envisages to amend his rights and obligations (but he cannot amend rights and obligations of employees).

The debtor, furthermore, should divide creditors and shareholders into separate classes based on the difference (if any) in their rights under the Scheme. Creditors and shareholders that have a different ranking in the event of bankruptcy of the debtor should in any event be divided into separate classes (for example: secured creditors and unsecured creditors should fall in different classes and senior creditors should be distinguished from subordinated creditors). A creditor could be part of more than one class of creditors, depending on the nature of its claim(s) (see also amendment 1 and 2 in relation to classes).

The Scheme must contain all information necessary for creditors to enable them to form an opinion on it. This includes, inter alia, the criteria for the classification of creditors and shareholders, the financial consequences for each creditor class, the envisaged asset value if the Scheme is approved, the expected asset value in the event of liquidation of the debtor and the assumptions and criteria on which these valuations are based (see also amendment 1).

Voting

Each creditor and shareholder whose rights and obligations will be affected by the Scheme is entitled to vote. Each class of creditors or shareholders will vote separately. For each class of creditors or shareholders, respectively 2/3 of the total amount of claims by the creditors or 2/3 of the subscribed capital must vote in favour of the Scheme in order for it to pass, which can lead to horizontal cram-down of dissenting creditors.

Approval

If at least one of the classes of creditors that in bankruptcy would be fully or partially paid voted in favour of the Scheme, the debtor can file a request to the court for approval of the Scheme. If the court sanctions the Scheme, it binds all creditors affected by the Scheme which potentially leads to a cross-class cram down of dissenting creditors. The court must withhold its approval if the debtor has not complied with the formal requirements for a Scheme under the WHOA (e.g. division of classes or provision of information in the Scheme).

In addition, the court can reject approval of the Scheme upon request of creditors or shareholders that voted against the Scheme if (i) that creditor or shareholder is worse off under the Scheme than it would be in case of bankruptcy of the debtor, (ii) that creditor is part of a class that voted against the Scheme and the order of distribution under the proposal deviates from the statutory or contractually priority of creditors or (iii) that creditor is not granted the right under the Scheme to choose a cash payment equal to the amount it would have received in bankruptcy of the debtor (see also amendment 1 and 3).

Effects on third parties

Amendments to contracts

The WHOA allows the debtor to propose its counterparties to amend a contract as it deems fit. If such proposal is not accepted by the counterparty, the debtor can, with approval of the court, terminate the contract taking into account a notice period effective as per the date the Scheme is sanctioned by the court. Any damage claims the counterparty may have as a result of the termination can be included in the Scheme.

Ipso facto clauses

Contracts often include a clause that the contract can be terminated if the counterparty is in a bankruptcy or similar procedure. Such clause is unenforceable under the WHOA. Counterparties of the debtor cannot terminate, amend or suspend a contract on the basis that the debtor has initiated a Scheme. A counterparty could still invoke rights it may have following a default that has arisen before the WHOA procedure started, unless a 'stay period' (afkoelingsperiode) has been announced and the debtor grants security for new obligations arising during the stay period.

Stay period

When the debtor has submitted Scheme (or undertakes to do so within two months), it can request the court to announce a stay period (afkoelingsperiode). During the stay period, the debtor remains entitled to trade goods under its control (including goods that are under title of retention of third parties) and no third party can take recourse against goods that are under control of the debtor without authorisation of the court. In addition, the debtor can request that attachments are lifted and application for the suspension of payment or bankruptcy of the debtor are suspended. The stay period lasts a maximum period of four months, but the stay can be extended for another four months upon request of the debtor.

Financing of the debtor

To avoid the debtor is confronted with (more) liquidity issues, the WHOA allows interim financing to be provided with first ranking security being provided in favour of the lender. Such financing cannot be challenged if it is authorised by the court, which authorisation will be provided if new financing (i) is necessary to continue the business 'going concern' while the Scheme is prepared and (ii) is expected to serve the interests of creditors without being prejudicial to an individual creditor.

In addition, banks who have provided a current-account facility can continue to set-off debt if such set-off is performed under financing that supports the debtor to continue 'going concern'.

Cross-border recognition

When the debtor submits its restructuring declaration with the court, it can choose whether it wants the procedure to be public or undisclosed. If the procedure is public, it will fall under the scope of the European Insolvency Regulation. In that case only debtors with its centre of main interest (COMI) in the Netherlands can initiate a restructuring under the WHOA. The benefit is that effects of the Scheme under a public procedure will be automatically recognised and enforceable in the EU.