In vari­ous blogs, we informed you on cer­tain aspects of the Dutch Scheme of Arrange­ment (the “WHOA“).  This law will enter into force on 1 Janu­ary 2021.  In this blog, we reflect on the final part of the WHOA pro­cess:  the court approv­al of the restruc­tur­ing plan and the grounds for refus­al.

 

The court approv­al

In a WHOA pro­cess, dif­fer­ent groups of cred­it­ors are divided into classes in accord­ance with their rank in a bank­ruptcy situ­ation. Each class may vote on the restruc­tur­ing plan. A class agrees if 2/3 of the cred­it­ors in that class (to be determ­ined on the basis of the amount of their claims) agree. The agree­ment of at least one class is neces­sary to sub­mit the restruc­tur­ing plan to the court for approv­al and thus to bind the oth­er non-con­sent­ing classes to the agree­ment. This should be a class of cred­it­ors who are expec­ted to receive a cash pay­ment in the event of bank­ruptcy of the debt­or. If the agree­ment only affects cred­it­ors who do not receive any dis­tri­bu­tion in the event of bank­ruptcy, then the lat­ter require­ment does not apply. For SMEs, the sup­ple­ment­ary test applies that they them­selves have to agree to the sub­mis­sion.

The judi­cial review of the restruc­tur­ing plan is import­ant because cred­it­ors’ rights can be shortened against their will.  In order to pro­tect their rights, the court must assess if cer­tain con­di­tions have been met and cred­it­ors them­selves can also oppose.

 

Grounds for refus­al

The court will test wheth­er the entry test for the WHOA has been with, in par­tic­u­lar, that the debt­or is in a state where it is reas­on­ably plaus­ible that he will not be able to con­tinu­ously pay his debts. Fur­ther­more, the court will assess wheth­er the cred­it­ors have been informed timely at the court hear­ing, wheth­er all the required inform­a­tion has been made avail­able to cred­it­ors for the assess­ment of the restruc­tur­ing plan and in such a timely man­ner, wheth­er the clas­si­fic­a­tion and vot­ing pro­ced­ure com­ply with the require­ments of the law. The court will also assess wheth­er the ful­fill­ment of the restruc­tur­ing plan is suf­fi­ciently guar­an­teed and wheth­er any new fin­an­cing to be attrac­ted does not mater­i­ally harm the interests of exist­ing cred­it­ors. A court may also refuse approv­al if there are oth­er reas­ons to do so and this gives the court a wide degree of free­dom to assess the restruc­tur­ing plan.

The law also sets out a num­ber of spe­cif­ic grounds that cred­it­ors can argue to block approv­al of the restruc­tur­ing plan. One is if the oppos­ing cred­it­or can argue that he is worse off with the plan than in the event of bank­ruptcy. These con­cerns the so-called “best interest test“. If not all classes have agreed to the plan, the court may, at the request of a cred­it­or or a group of cred­it­ors, also reject the agree­ment if the value real­ized with the plan is not dis­trib­uted fairly in accord­ance with the leg­al rank­ing. These con­cerns the so-called “abso­lute pri­or­ity rule”. An excep­tion has been made for micro-enter­prises, small busi­nesses or com­pan­ies with few­er than 50 employ­ees. These cred­it­ors should receive, in prin­ciple, at least 20% and if this does not hap­pen and there are no ser­i­ous reas­ons on the basis where of this min­im­um threshold can­not be met, approv­al may be rejec­ted at the request of a cred­it­or. Rejec­tion is also pos­sible if cred­it­ors (with the excep­tion of com­mer­cial secured fin­an­ci­ers) do not have the right to opt for a cash pay­ment equal to the amount they would receive in the event of bank­ruptcy. This may play a role if, for example, cred­it­ors are offered shares under the agree­ment instead of a cash pay­ment.

 

“You snooze, you loose”

Cred­it­ors can only rely on the grounds of rejec­tion if they protest to the debt­or with­in a skill­ful time after they become known with the pos­sible exist­ence of the grounds for rejec­tion. It is there­fore import­ant for cred­it­ors not to wait until the hear­ing, but as soon as they are aware of any grounds for rejec­tion, to make this known dir­ectly to the debt­or. Oth­er­wise, the adage “you snooze, you loose” applies. It is not pos­sible to appeal against a homo­log­a­tion gran­ted. As soon as the restruc­tur­ing plan is approved, the stake­hold­ers involved are bound to it.