The Dutch Bankruptcy code (Faillissementswet) (Bankruptcy Act) is about to be updated with a valuable restructuring instrument that could benefit distressed Dutch businesses and their creditors amid the Covid-19 crisis and the current and upcoming economic challenges brought on by the pandemic.
The introduction of the WHOA (Wet Homologatie Onderhands Akkoord) (the Bill) has become even more urgent and relevant amid the Covid-19 crisis, and its amendments and new sections to the Bankruptcy Act will bring a long-awaited equivalent of the UK scheme of arrangement and the US Chapter 11 to the Netherlands.
Last week (26 May 2020), the Bill was approved by the Dutch Parliament (Tweede Kamer) and it is now with the Senate (Eerste Kamer) for final approval with hopes widespread that the Bill can still be approved this year. The WHOA had been expected to be adopted in 2020, as we reported in our insight in November 2019. However, the process has shown to be quite unpredictable in the past.
Several amendments were proposed and some were included in the revised Bill. The first draft of the WHOA was submitted to the Dutch Parliament on 5 July 2019.
The WHOA is a big step in the implementation of the EU Directive 2019/1023, which amends the previous directive on restructuring and insolvency. Member States – with some exceptions – are required to implement before 17 June 2021 the directive on preventive restructuring frameworks, discharge of debt and disqualifications, and measures to increase the efficiency of these procedures.
The significant amendments included in the revised Bill are: claims of secured creditors can be split; no cash payment is required for secured creditors; a minimum 20% pay-out for smaller creditors unless the court decides there are compelling reasons to deviate from this rule; and an evaluation after three years of the effectiveness of WHOA and its changes to Dutch bankruptcy legislation.
Claims of secured creditors can be split
Secured creditors will only be put in a separate class for secured creditors to the extent their claims are secured (amendment 35 249 nr 14). For the remainder of their unsecured claim they will be put in a class of unsecured creditors.
The value of the security package – and therefore the amount of the claim covered by security – will be determined on a liquidation scenario in bankruptcy and not on the basis of the going concern value that would be created by a successful WHOA procedure. This means that it becomes more likely that claims of secured creditors will be split into different classes. This should promote reaching a consensual deal.
No cash payment for secured creditors
The first draft of the Bill included the right for a creditor who voted against the scheme to demand that the court rejects the scheme, if the creditor does not have the option to elect for a cash payment equal to the amount of cash they would have received in case of a liquidation scenario in bankruptcy.
In the adopted amendment (35 249 nr 24), secured creditors will not have the option to choose for a cash payment if such creditors are offered a debt-for-equity swap. Instead such creditors will have (and should have) the option to elect a different form of distribution or return (since for instance banks and government may be reluctant or even prohibited to accept shares).
Although the amendment itself does not specifically state what a "different form of distribution or return" means, the commentary gives examples such as deferred payment and/or interest payments only (while their claim remains secured). The idea of this amendment is that the right to elect for cash payment could otherwise frustrate the process as the scheme would require a refinancing of that particular secured creditor.
A minimum 20% pay-out for smaller creditors
A further amendment creates a separate class of unsecured creditors for small and medium-sized enterprises, "natural" persons or one-person businesses, who are offered less than 20% of their claim (for services, goods or wrongful act) under a proposed scheme.
If this class of creditors has voted against the proposed scheme, an individual creditor can request the court to reject the approval of the scheme if the creditor receives less than 20% of their claim without any compelling reasons (this leaves some flexibility in cases where the 20% is not feasible). Whether there are compelling reasons will be up for the court to decide (35 249 nr 25). This rule was inspired by a similar restructuring tool used in Austria, where a debt repayment quota of 20% applies as well.
The 20% rule does not apply to: parties that purchased debt for less than 20% of the value; subordinated creditors, group companies that provided financing, shareholders that also have unsecured claims, and holders of bonds (obligaties).
Evaluation after three years
Three years after the entry into force of the WHOA, the effectiveness of the new restructuring scheme will be evaluated. In our view, this review will be quite useful because it remains to be seen if all measures will have the desired effect.