New Dutch insolvency law, WHOA
By Jantine Hak of Kruger
The Dutch bankruptcy law is 125 years old, very solid, but in some parts outdated. For example, the 1893 Bankruptcy Act does not take into account matters such as an extra-insolvency settlement and / or the influence of European regulations and developments.
In order to reflect recent developments in this area, the 'Wet Homologatie Onderhands Akkoord' (WHOA) was submitted to the House of Representatives in the Netherlands on 5 July 2019. The proposal was adopted unanimously by the House of Representatives on 26 May 2020. The Senate is now considering this draft legislation and it is expected that this will be introduced in the Netherlands at the end of 2020.
This article provides a brief overview of the WHOA as it is expected to be implemented in the Dutch Law at the end of 2020 .
The WHOA aims to strengthen the reorganizing capacity of companies by restoring the capital structure of a company. WHOA is a compulsory settlement scheme outside of a moratorium and bankruptcy. The WHOA is designed to introduce a legally effective agreement regulation in the Netherlands as well, which is currently not yet legally defined. The bill is in line with the European Directive EU 2019/1023 on preventive restructuring systems. This Directive obliges Member States to introduce pre-insolvency proceedings that meet certain preconditions into their national law.
The WHOA applies to companies that may go bankrupt due to over-indebtedness, but whose business activities are still fundamentally viable. A debtor is eligible for restructuring under the WHOA "if he is in a condition where it is reasonably plausible that he will not be able to continue paying his debts." Only when this necessity criterion has been met, WHOA is in principle applicable. Regardless of legal form and size of the company. A debtor can propose a composition to providers of capital that provides for a change in their rights. The debtor retains full power of management and disposition throughout the entire process ("debtor-in-possession").
The plan provides for the amendment of the rights of the debtor's providers of capital. The WHOA can bind all types of capital providers, including shareholders, unsecured creditors, preferred creditors and creditors with security rights. Workers' rights cannot be changed with a WHOA agreement. The provider can choose whether he wants to address the composition to all of his capital providers or part of them.
1. Start procedure
A WHOA procedure can start in two ways:
The debtor starts a WHOA procedure himself
A creditor, shareholder, employees (united in Works Council) or the court itself asks the court to appoint a so-called ‘herstructureringsdeskundige’ (a restructuring expert).
The restructuring expert will then draw up an agreement. As long as a restructuring expert is appointed, the debtor can no longer offer a settlement himself.
In principle, to start a WHOA, no formal opening decision by the court is required. However, it is possible to file a ‘startverklaring’ (a starting statement) with the court. The advantage of filing such a starting statement is that the debtor has access to various provisions, such as protection against fraudulent preference, ordering a cooling-off period (during this period creditors cannot recover from the debtor's assets, attachments can be lifted and granting a moratorium or a declaration of bankruptcy suspended) and making tailor-made arrangements.
Restructuring expert can be appointed by creditors or court. The court can also appoint an observer, who supervises the realization of an agreement. You can opt for an open or a closed procedure.
2. Prepare WHOA proposal
Debtor or restructuring expert draws up a proposal for approval. There are no material requirements regarding the proposal. There are formal requirements. For example, the plan must contain all information that creditors need to be able to form an opinion about the plan offered.
Important elements when drawing up a proposal for agreement:
The content of the composition is mainly determined by the valuation on which the composition is based.
When submitting an agreement, insight must be given into two values:
- ‘Reorganisatiewaarde’ (enterprise value after proposed financial restructuring). Concerns the value that is expected to be realized when the agreement is concluded and available to all providers of capital existing at the time of the approval.
- Value at settlement; the enterprise value without financial restructuring.
If the ‘reorganisatiewaarde’, including the costs of the reorganization, is higher than the value at settlement, restructuring under WHOA is in principle rational.
The calculation of the ‘reorganisatiewaarde’ will be open to discussion, partly because of the uncertainties faced by companies in distress and the time pressure under which these valuations are drawn up. A wide variety of valuation methods are available. The application of these methods in situations of potential threat of bankruptcy requires the necessary adjustments. For each valuation method to be chosen, the future expectations determine the value of the company. In the case of WHOA, a "distressed enterprise value" applies: the current enterprise value is, after all, negatively affected because the expected turnover and cash flows are negatively affected by the situation of distress.
The role of restructuring expert also includes objectivily assessing the necessary valuations in the submitted plan.
The providers of capital are divided into classes according to their rank, stakes and positions. Creditors of different rank should in any case be classified in different classes. The debtor can choose to make a further subdivision within the categories.
Based on the rules of the game, the ‘reorganisatiewaarde’ is "redistributed" among the capital providers. Please note that the restructuring value will not be distributed in cash, but will in principle or mainly be distributed in the form of various securities. The WHOA also provides for the option for the debtor to unilaterally terminate an agreement that is incriminating for him.
3. Approve / Submit WHOA proposal to providers of capital
The WHOA is flexible. The provider of the agreement has great freedom to organize the agreement in the way that suits him best. After the debtor or the restructuring expert has definitively established the content of the composition to be proposed, the debtor puts the composition to a vote by submitting the composition in final form to the voting providers. It is then no longer possible to change the agreement. The provider of the composition determines the voting procedure himself.
4. Voting by capital providers
Voting by capital providers takes place in the classes. Only the classes of capital providers whose rights are changed by the plan are entitled to vote. A class has voted in favor if at least two-thirds of the total value of the claims of voting providers of capital votes in favor (for shareholders, this is assumed to be issued capital).
5. Submit homologation to court and homologation hearing
If at least one class has agreed to the composition, the debtor can request the court to confirm the composition, after which the composition is binding on all persons entitled to vote. The judge checks the agreement against homologation criteria:
- General grounds for rejection include: whether there is a pre-insolvency situation, whether the formal requirements have been met, can the plan actually be fulfilled by the debtor. For example, the court will not approve an agreement if it is rejected from the legal order of rank and the class does not agree or there is no justification for the deviation.
- Additional grounds for refusal can be invoked by asset providers if they have voted against the plan. Individual providers of capital can also request the court to refuse the approval of the plan because they would receive rights under the plan that have a significantly lower value than the liquidation value.
By approving the plan, the court binds providers of funds to this plan against their will. After approval, the plan is binding on all providers of capital to whom the plan is addressed. It is not possible to lodge an appeal.
If the court does not approve the request, there is no agreement and the debtor may not offer a WHOA agreement for three years.
The WHO is characterized by short timelines, which means that the entire procedure is expected to be completed within four to five weeks after the proposal has been presented.
Proponents argue that many bankruptcies can be prevented by means of a compulsory settlement. Capital providers are in principle no worse off than if the company concerned had been declared bankrupt. However, there are some reservations about the proposal.
The interests of small creditors may be at stake if they are obliged to agree to an agreement based on approval. In order to meet this comment, the legislative proposal provides that SME creditors will at all times receive a minimum percentage of their claim.
Also, the law does not provide a solution for the fact that a company in distress often also has to do something about current wage costs. In many cases, a company in financial need will have to dismiss part of the staff and / or implement changes to the terms of employment in order to restore the company to financial health. However, such changes are costly and have not been included in the WHOA.
And finally it is now, logically, still a theoretical legal, framework. Only when the first WHOA is to be implemented it will become clear which sensitivities play a role in valuations, and what effect the distribution of this value among capital providers has on the actual value, the performance and the way of financing the company. Ultimately, it's all about the company and its future!
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