Since the global financial crisis (i.e. the Covid 19 outbreak and the current nitrogen policy), insolvency and restructuring law have been at the forefront of initiatives in Europe. Especially the subject of a compulsory settlement outside of formal insolvency proceedings has been the focus of attention in Europe for quite some time. There is currently no Dutch statutory regulation for a compulsory agreement outside of bankruptcy. At present, a private debt restructuring agreement outside of bankruptcy can only be concluded if all involved creditors and shareholders agree. This means that one opposing (minority) creditor or shareholder is able to obstruct the debt restructuring, which in turn often leads to (unnecessary) bankruptcy.
The increased importance of a compulsory agreement outside liquidation was recognized by the European Parliament when it effectuated the Restructuring Directive (EU 2019/1023) on July 19, 2019 (the “Directive“). The Directive obliges EU Member States to introduce an effective pre-insolvency restructuring proceeding with the aim of rescuing viable businesses (which will also contribute to the preservation of employment) and preventing formal insolvency proceedings. As a consequence of the aforementioned obligation, the legislative proposal “Act Homologation of Private Agreement” (Wet Homologatie Onderhands Akkoord, or abbreviated “WHOA“) has been submitted to the Dutch Senate (Eerste Kamer) on May 26, 2020. The WHOA will be embedded in the Dutch Bankruptcy Act.
Private Homologation Agreement
Under the WHOA, a company can offer its creditors and shareholders a private agreement outside bankruptcy regarding debt restructuring. As a condition of such agreement, the company should face the threat of an insolvency procedure. The Dutch court can then approve, i.e. homologate, this agreement. The homologation ensures that creditors and shareholders who have not agreed can nevertheless be bound by the agreement if the relevant decision-making and its content meet specific requirements. The process can be initiated by the company or, via a restructuring expert who is appointed by the Dutch court on the request of the company, creditors, shareholders and/or employees’ representatives (“Restructuring Expert”). A formal declaration must be made within the Dutch court to initiate the process.
The agreement can be applied to all creditors and shareholders. An agreement that is limited to one or more groups (classes) of creditors and/or shareholders is also possible. The agreement may envisage (i) an adjustment of the rights and position of creditors and/or shareholders, (ii) clearing debts, (iii) debt for equity swap and/or (iv) changing or terminating regular agreements (except for employment contracts). Creditors and shareholders must be divided into different classes if their rights vis-à-vis the debtor are too different (i.e. unsecured, preferred and/or secured creditors). In such event, each class must receive a proposal tailored to that class. The agreement must also contain certain information, such as, amongst others:
- the classification of the creditors and shareholders and the criteria on the basis of which the division of classes is made;
- the financial implications of the proposal for each class of creditors/shareholders;
- the reorganization value that is expected to be realized by the agreement; and
- the expected liquidation value in the case of a formal insolvency procedure.
Vote on Agreement
All creditors and shareholders whose rights are affected under the agreement are entitled to vote. Voting occurs per class. At least one class of capital providers should approve the agreement to proceed with the homologation process. A class is deemed to have agreed to the agreement if the creditors/shareholders who voted in favor of the agreement together represent a two-thirds majority of the total debt or issued capital of the respective class. In addition, the approving class should consist of creditors/shareholders that are entitled to a cash distribution in the case of an insolvency procedure, unless none of the classes are expecting a distribution. Voting does not have to take place during a physical meeting and can be done electronically. If a party votes in favor of the agreement, this party loses its right to oppose against the agreement at a later stage. In addition, the company must draw up a report in which it states the voting results (“Voting Report“).
If one class of capital providers has approved the agreement, the company or Restructuring Expert can request for approval/homologation of the agreement to the court. The court will assess and approve the agreement within 8-14 days after (i) receipt of a request thereto and (ii) the deposit of the Voting Report with the registry of the court.
To approve the request, certain requirements must be met: (i) the agreement is necessary (i.e. threat of insolvency); and (ii) the decision-making process has been executed correctly (i.e. correct class division of creditors, all affected creditors have been duly informed and given the chance to vote).
The court may reject the request to approve the agreement, if:
- the agreement is deemed unfair;
- the position of a creditor under the agreement has a lower value compared to its position in a bankruptcy situation (‘Best Interest of Creditor Test‘);
- the allocation of the reorganization value among the various (and ranked) stakeholder classes is not in line with their legal ranking; or
- small businesses (i.e. less than 50 employees) creditors receive less than 20% of their claim.
Upon court approval, the agreement may bind all creditors and shareholders involved in the agreement. Creditors and/or shareholders who have not agreed to the agreement can therefore be forced to cooperate with the implementation of the agreement. No appeal is possible. With this compulsory private agreement, a bankruptcy can be prevented.
Now that the Covid 19 crisis is expected to bring many companies into financial difficulties, it is certainly important that the WHOA comes into effect quickly. One of the advantages of this new law is that an agreement can be homologated within weeks. To achieve this, good preparation is very important.
The full text of the Dutch legislative proposal of May 26, 2020 can be found here (in Dutch only): https://www.eerstekamer.nl/behandeling/20200526/gewijzigd_voorstel_van_wet_3/document3/f=/vl90m1r7f7xm_opgemaakt.pdf
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