29 May 2020

On 5 July 2019, a bill for a Dutch pre-insolvency procedure was submitted to parliament. This bill was inspired by the scheme of arrangement in the UK Companies Act 2006 and Chapter 11 of Title 11 of the US Bankruptcy Code. The WHOA will allow a debtor or restructuring expert to propose a plan that may help avoid the debtor’s insolvency. The WHOA will combine a fast and flexible framework for concluding pre-insolvency schemes witha high degree of deal certainty.

Key Features of the WHOA are:

Debtor retains possession: The debtor will retain both the possession of its property and the authority to dispose of it during the proceedings (i.e. no other administrator or supervisor is involved besides the court itself). The debtor can continue to conduct its business as normal.
Court-ordered protection period: WHOA proceedings can be initiated together with a request for a court-ordered stay of up to eight months in aggregate. If granted, the stay will prevent creditors from enforcing their rights including the right to invoke termination clauses in contracts. Attachments may also be lifted.

Plan proposal by the debtor or by a restructuring expert: The debtor can propose a plan on its own motion. Creditors, shareholders and works council representatives are not allowed to propose a plan themselves, but they can petition the court to appoint a restructuring expert who may propose a plan on their behalf. If a plan is proposed by a restructuring expert, the debtor’s consent is only required if the debtor qualifies as a small or medium-sized enterprise (“SME”). If a plan is proposed by a restructuring expert, the debtor retains the right to propose an alternative plan to the restructuring expert.

Dual track: The WHOA provides two different tracks:

• A ‘public’ track. The public track is suitable for complex multiple class restructurings. The public track is included in the EU Insolvency Regulation. Plans confirmed after a public track will be automatically recognised in each EU member state (except Denmark), or
• A ‘non-public’ track. The non-public track is more suitable for targeted single class restructurings. A plan confirmed under a non-public track will not be recognised under the EU Insolvency Regulation.

Maximum flexibility: As a framework, the WHOA does not prescribe the contents of a plan. Proponents can draft a plan as they see fit (e.g. extending and/or reducing debt, debt for equity swap, sale of assets, limited to only a subset of the capital structure, etc.). The WHOA provides plan proponents with a high degree of flexibility on structuring the process (e.g. timing, electronic voting, etc.).

Amendment/termination of long-term contracts: Long-term contracts can be amended or terminated under the WHOA. Employment contracts are exempted. Claims for damages in relation to termination can be included in the terms of a plan.

Class voting: Only creditors or shareholders whose rights are affected by a plan are entitled to vote. A two thirds (2/3) majority in amount of the claims of all class participants who have cast a vote is required for class acceptance. Class formation is based on the similarity of class participants’ new and existing rights.

Cross-class cram down: Once all classes have accepted a plan, it will bind all participants regardless of their rank or whether they have voted in favour of the plan. If one or more classes oppose a plan, the court may nonetheless confirm the plan.

Absolute priority rule: Participants of an opposing class may object to the court confirming a plan if the value realised by the plan is distributed in a way that deviates from statutory or contractual priority and, as such, impairs the opposing class. In this case, the court may reject the plan unless it believes that there are reasonable grounds to support the deviation in distribution according to rank. In the case of a class of SME creditors, the absence of reasonable grounds is assumed if these creditors receive less than 20% on their claims. This assumption can be rebutted (with robust enough evidence) if the value of the debtor’s enterprise is such that an allocation of value of at least 20% of an SME creditor’s claim is not feasible. Additionally, if the reorganisation value is distributed in deviation of priority, non-secured creditors of a dissenting class who have voted against the plan may insist on a cash payout equal to the value they would have received in a liquidation scenario.

Court involvement: To promote deal certainty, the debtor or restructuring expert can petition the court to provide interim relief both on procedural issues as well as substantive issues (e.g. class formation, voting procedures, etc.). A dedicated team of specialised judges will deal with WHOA cases. To ensure a quick turnaround, most decisions cannot be appealed.

Since the coronavirus outbreak in Europe, various lawyers, academics and insolvency practitioners have urged the Dutch government to fast-track implementing the WHOA. In parliament, however, it was felt that the WHOA does not offer enough safeguards for SMEs and various amendments were proposed with this aim in mind. A couple of these amendments, such as the minimum of 20% for SME claims, have been accepted and will be signed into law. The bill was accepted by the Dutch House of Representatives (Tweede Kamer) on 26 May 2020. Once the Dutch Senate (Eerste Kamer) has accepted the bill in its current form, it could come into force as early as 1 July 2020.