In various blogs, we informed you on certain aspects of the Dutch Scheme of Arrangement (the “WHOA“). On 1 January 2021, this legislation will become effective. In this blog, we will set out the application criteria and the different steps of a WHOA procedure.
The WHOA enables enterprises that face financial difficulties to reach an agreement with their creditors, even if not all creditors are willing to cooperate. After approval (homologation) by the court, the agreement can be imposed on the non-cooperating creditors. The agreement could inter alia provide a change of the creditors’ rights, such as the deferral of payment, a partial write-off, the conversion of debts into shares and the amendment of agreements. The objective of the WHOA is to prevent bankruptcy and the associated loss in value, and, as such, the improvement of the position of the creditors.
The WHOA is predominantly introduced for enterprises with a high debt burden that also have business activities that are viable after a restructuring. Furthermore, the WHOA is introduced for enterprises that wish to cease their activities, but whose debts exceed the assets. These enterprises could sacrifice a so-called liquidation settlement agreement.
A debtor is able to apply for a WHOA arrangement if it is reasonable to assume – based on the financial position of the debtor – that the debtor is no longer able to pay his debts. To clarify these criteria, the legislator has given the example of a debtor who foresees that he cannot repay a loan that matures in the upcoming year. The WHOA procedure can be initiated at an early stage and it is recommended to use this time before the financial position becomes critical. Creditors, shareholders or the works council are also able to apply for a WHOA procedure. In that case, the court will also appoint a restructuring expert.
The WHOA procedure cannot be initiated if a WHOA procedure has been unsuccessfully requested in the past three years.
Steps to be tasks
Together with his advisers, the debtor will have to decide in which way the liabilities side of its balance sheet should be restructured. The debtor is able to decide on the scope and content of the restructuring plan. The debtor could decide, for instance, which creditors should be involved in the restructuring plan, such as only the financing banks and shareholders or all creditors. Furthermore, the debtor is also able to request the court to amend or terminate existing agreements. The WHOA offers the possibility thereto, except for employment agreements (we refer to our blog below about this subject).
The various groups of creditors should be classified in accordance with their ranking in a bankruptcy distribution. Each class of creditors is able to vote on the restructuring plan that has been offered by the debtor. The entire class approves the restructuring plan if 2/3 of the creditors in that class (to be determined based on the amount of the claims) vote in favor of the plan. The approval of at least one class of creditors is necessary in order to submit the plan to the court (and, as such, to legally bind the opposing classes to the plan). Creditors can object to the homologation of the restructuring plan by the court. For further information about the right to object, we refer you to our blog below regarding this topic. Creditors should be well-informed by the debtor in order to be able to assess the offered restructuring plan. The information should contain a valuation of the reorganization value and the liquidation value of the enterprise. These valuations are important as the concept is that reorganization value is divided among the various capital providers in accordance with their rank, while creditors should always receive more than they would receive in case of a bankruptcy (liquidation value). Small- and medium-sized companies should, in principle, receive a minimum of 20% of their claim, unless there is a compelling reason not to do so.
During the preparation of a restructuring plan, it may be necessary to use certain options that the WHOA offers. These options include the so-called “cooling-off period”. A cooling-off period can be proclaimed by the court and prevents creditors from claiming their goods during this period. The court is also able to protect certain legal acts of the debtor against nullification by the bankruptcy receiver (based on actio pauliana). To use the above-mentioned options, a kick-off statement should be filed at the court. For more information on the supportive measures of the WHOA, please see the blog below.
The debtor has to decide whether he wishes to start an open or a closed WHOA procedure. An open (public) procedure will be published in the Dutch insolvency register and the Dutch trade register. The decision also has consequences for the jurisdiction and the international recognition of the arrangement (see also our blog below about this subject).