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.