Financial Restructuring Bill (WHOA) allowing cram down adopted by Dutch Parliament, Senate expected to vote soon
On 26 May 2020, Dutch Parliament has adopted the proposal for the Financial Restructuring Act, known in Dutch as WHOA (which stands for Wet Homologatie Onderhands Akkoord). The WHOA allows businesses to seek a court-acpproved cram down which is comparable to Chapter 11 or Scheme of Arrangements.
The WHOA presents interesting features in international settings and is based on the European Insolvency Regulation, allowing cross border recognition and application by foreign businesses with their center of main interests or comi in the Netherlands, and may also be applicable to businesses with close ties to the Netherlands.
The WHOA presents a long-awaited and important step in the reform of Dutch bankruptcy law. This reform has taken years, but has been accelerated in an unique way in the face of the Covid-19 crisis after an appeal thereto by the restructuring community in the Netherlands. The bill was adopted unanimously by Parliament. The Senate is expected to vote very soon on the bill, which may lead to the enactment of this act possibly within months to come.
Contents of the WHOA
The WHOA enables businesses that are in financial distress, but nevertheless can survive after a debt restructuring, to offer a reorganization scheme which after approval by the bankruptcy court is binding upon all creditors and shareholders (if applied in the scheme). This is new in the Netherlands. In the current situation, the debtor needs to seek approval from each and every creditor if it wishes to reorganize its debts. Consequently, at present a single creditor can in principle block a reorganization. If the WHOA comes into force, non-cooperating creditors can under certain circumstances be forced into the scheme. Of course, the scheme will need to have the necessary checks and balances, as we will explain in this article.
The scheme will be offered by the debtor, but it can also be offered by a party described in the WHOA as an ‘insolvency expert’. Such an expert can be appointed by the court at the request of a creditor, a shareholder or even the works council of the debtor. It is possible to follow a public procedure or a non-public procedure. In the latter case, the negotiations can be held privately and without (initially) disclosing to the public, which can be a preferred option in certain circumstances. There are also downsides to the non-public procedure, as shall be discussed below in the international setting.
The procedure leading to the scheme is intended to serve as complimentary and backup of an amicable process that in principle can be applied without (initial) interference of the court. Court interference is not necessary until the phase where court approval is requested, although the possibility exists for the parties concerned to involve the court in an earlier stage for relief, or to enforce certain rights.
The debtor or the court-appointed reorganization expert can impose a vote on the proposed scheme. The creditors are divided into certain classes based on their position (e.g. unsecured creditors, one or more classes secured creditors, subordinated creditors). Also shareholders can form a class. The possibility exists to propose the scheme only to a limited group of creditors (e.g. only secured creditors and subordinated creditors). The remaining creditors (e.g. the trade creditors) will then have to be paid in full.
The WHOA resembles and has to a great deal been inspired by Chapter 11 or Scheme of Arrangements.
If it turns out that not all parties in a class voted in favor of the scheme, but at least a 2/3 majority of the total amount of debt in that class has voted in favor, then this class will have accepted the scheme. The initiating party can go to court in order to request for approval by the court. If the court approves, the scheme is binding for all parties (creditors and possibly shareholders), including those who have voted against the scheme. Under certain circumstances the scheme can even be enforced upon whole classes that voted against the scheme.
Far-reaching protection of debtors
The WHO has far-reaching consequences for the protection of debtors. The process entails that the debtor remains in possession during the process and keeps control over its business, which is different from bankruptcy and moratorium of payments as we currently know in the Netherlands. The scheme can obviously entail that certain creditors will get a haircut, or no payment at all, or that they need to convert to equity. Furthermore, as stated above, shareholders can also be held to accept the scheme and suffer a dilution in their shareholdings.
Furthermore, during the negotiations the court can be requested to impose a ‘cooling off’ period or stay, comparable with what is currently applicable in the bankruptcy and moratorium regulations. During this period no creditor can take enforcement action, and pledgees of a ‘silent pledge’ cannot inform any pledged debtors, receive any payments or set off, unless such pledgee provides replacing security. Also , the scheme can impose far-reaching changes in existing agreements and contracts. If the creditor who is a party to such agreement does not agree, then upon court approval, the debtor is allowed to terminate such agreement. So this is quite an infringement of creditor rights that creditors should be aware of.
Checks and balances
Obviously, a court approval of a scheme meets strict requirements and checks and balances. The scheme must, next to all procedural requirements, be reasonable for all involved parties. The premise of the WHOA is that if a business survives, the additional value that is created, the reorganization value, in the alternative case compared to bankruptcy, is preserved and distributed fairly between the involved parties.
This means that a scheme will only get a court approval and can be imposed against the parties who voted against, if the distribution does not deviate from the legal priority of debts (‘priority rule’). In addition, the party that voted against cannot worse off than it would have been in a bankruptcy situation (‘best interest of creditors test’). At the last moment, an amendment was made in Parliament to protect smaller unsecured creditors: such creditors should in the scheme receive a haircut of not more than 80%.
As stated above, the WHOA has an interesting international dimension. It is based and it is intended be admitted to the list of insolvency proceedings under the EU Insolvency Regulation. This means inter alia that if the Dutch court has jurisdiction, also non-Dutch creditors and security are bound by the scheme. The court approval will then be recognized in many other European countries on the basis of the EU Insolvency Regulation. Also for non-Dutch business it can therefore be interesting to apply for the Dutch WHOA on their reorganization. This is possible if their comi is or will be based in the Netherlands, and it may also be applicable for businesses with otherwise close ties to the Netherlands.
For recognition under the EU Insolvency Regulation it is, however, required to follow the public procedure instead of the non-public procedure (as described above). Nevertheless, even in an international setting it can be interesting to follow the non-public procedure. It depends on the circumstances and which foreign parties would be agreeable to the scheme.
What can Ploum do for you?
Our law firm has extensive expertise in the area of reorganizations, restructuring and insolvency. We have a restructuring team in which different fields of law are represented and can advise you on the various matters. We can assist you:
as debtor in:
- advising on the chances of success of a WHOA scheme for your business;
- combining a WHOA scheme with a reorganization and partial lay off of your workforce in the Netherlands;
- designing, preparing and seeking of a creditor vote;
- choosing for the public or non-public procedure;
- advising on international aspects;
- requesting a ‘cooling off period’ for your business;
- advising and preparing the legal procedure;
- resisting a request to appoint restructuring expert on your behalf;
as creditor in:
- advising on your rights as creditor, and determining your strategy, possibly with other creditors;
- exercising of creditor rights;
- requesting the court to appoint a restructuring expert on the debtor’s behalf to commence a WHOA scheme;
- devising your voting strategy;
- defending against the initiative, a request for a cooling off period or requested changes in (your) agreement, other motions of the court or the court approval of the scheme itself.
Not unimportantly, it should be kept in mind that your agreements of your Dutch business, or agreements with Dutch business may have to be reviewed. It may e.g. be necessary to qualify a WHOA procedure as an event of default. Also in corporate governance situations it should be taken into account that a WHOA scheme can be requested by the board of directors without approval of shareholders.
We will of course keep you informed of any further developments in the legislation process. We expect, however, that the Senate will also quickly vote on the proposal, so that it may become enacted and we can actually see the first schemes very soon, especially during the Covid-19 crisis.
If you are interested in the WHOA or if you have any questions, do not hesitate to contact the restructuring team of Ploum: