WHOA: the 20% rule for SME’s and the lim­it­a­tion of the pri­or­ity pos­i­tion of secured cred­it­ors

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Published 20 January 2021 Reading time min Author Robin de Wit Insolvency & Restructuring

In vari­ous items we inform 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 cred­it­or
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. A SME is a cred­it­or (i) who employs fifty 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 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 SME’s 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 SME’s 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
  • bond­hold­ers

It must be said that for the debt­or offer­ing a restruc­tur­ing plan, it might be dif­fi­cult to determ­ine wheth­er their cred­it­ors qual­i­fy as SME’s.

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.