In various items, 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 item, we discuss the last-minute changes made in the legislation process. These changes are to the advantage of the small SME creditor and to the disadvantage of financers with security rights.
20% rule for small creditors
The position of SME creditors is strengthened by the rule that this group of creditors should be offered at least 20% of their claim (the “20% rule“) in the restructuring plan, unless there are compelling reasons not to do so. An SME is a creditor who employs 50 or fewer people or who meets the requirements of Section 2:395a of the Dutch Civil Code (micro business) or Section 2:396 of the Dutch Civil Code (small business). A business qualifies as a micro or small business if at least two of the three requirements below are met with on two consecutive balance sheet dates:
- net turnover per year less than € 12,000,000
- balance sheet total less than € 6,000,000
- less than 50 employees
If less than 20% is offered to the SMEs, these creditors should be classified in a separate class. If the class of SME opposes to the restructuring plan, the court should assess the grounds for not offering the minimum threshold. In any event, the court will then assess whether it is sufficiently clear that a 20% distribution of the reorganization proceeds to SMEs is indeed not possible. If the court deems the arguments put forward insufficient to deviate from the 20% rule, it will not approve the reorganization plan.
The 20% rule does not apply to:
- parties who have purchased receivables for less than 20% of the value
- financers with a subordinated loan without collateral
- legal entities within the group that provide mutual financing
- shareholders who also have an unsecured claim on the debtor
It must be said that for the debtor offering a restructuring plan, it might be difficult to determine whether their creditors qualify as SMEs.
Priority for collateral holders limited to liquidation value
The WHOA legislation also stipulates that secured creditors shall be placed in a separate class only for the part of their claim that is secured by the value of the secured assets. For the other unsecured part, they will be placed in a class of creditors without priority. The secured part must be valued against the liquidation value. The background of this is the opinion that secured creditors should not have an exclusive right to the so-called “going concern surplus” – the added value achieved as a result of the reorganization.
No “Cash-Exit” for guarantors
A restructuring plan under the WHOA can modify creditors’ rights in many ways. Payments can be postponed but alternative payment in shares is also an option. Opposing creditors have the right to demand payment in cash equal to the amount they would receive in the event of bankruptcy. An exception is made for secured financers, who do not have the right to demand cash payment. However, if these secured financers do not agree to the debt for equity swap proposal, they should be offered an alternative. For instance, an amendment of the terms (for the secured part of their claim) that are more favorable to the debtor.