New Dutch restructuring law and the transfer of an account receivable portfolio

In-depth analysis

Introduction

In previous articles; New Dutch restructuring legislation: the best of both worlds and Pioneering use of new Dutch restructuring law we have addressed the relatively new Dutch ‘Court Approval of a Private Composition (Prevention of Insolvency) Act’ which aims to prevent a company from being declared bankrupt while it is still (partially) viable (the WHOA).

Recent case law demonstrates that the debtor’s intention to file for WHOA proceedings may have an impact on the secured lender’s rights under the finance documents and the enforcement of security.

Factual background

The case before the Dutch court involved a group of companies engaged in purchasing and selling receivables on a large scale (the Group). The Group is also engaged in the management of receivables, both of its own receivables and of receivables which it has sold and transferred to other companies (those other companies being the Funds).

The Group entered into a facility agreement with a lender (the Bank) pursuant to which the parties agreed that the Group would establish undisclosed rights of pledges for the benefit of the Bank on all of its existing and future receivables. The finance documents contained the usual information and cooperation undertakings from the Group, including the obligations to:

provide the Bank with all information on the pledged receivables
cooperate with the enforcement of the pledge and
run payments through the accounts held at the Bank.

The Group did not repay the loan on its due date and a payment default occurred. The Group's aim was to reach a controlled settlement with its creditors. It intended to sell its own portfolios jointly with those of the Funds, in a number of tranches, with each tranche consisting of receivables of both the Group and the Funds.

The Bank was concerned that the proceeds of the sales of the receivables would not be used to repay the loan. Their concern arose from the fact the proceeds from the first two sales of tranches that were completed were not run through the accounts held at the Bank.

For this reason, the Bank lodged an attachment for the purpose of preserving evidence (against both the Group and the Funds) and started summary proceedings. In these proceedings, the Bank requested that both the Group and the Funds provide all information regarding their receivables and restrain from disposing of their receivables.

In the Group and Funds' counterclaims, among other requests:

the Funds requested that the court order the Bank not to interfere with the sale of its receivables
the Group requested that the Bank refrain from enforcing its rights of pledge.

Judgment

Information undertakings

The Bank’s request for provision of all information regarding the receivables was rejected by the court on three grounds:

such information would partly consist of information which the bank is not entitled to, and the process of determining the information which the Bank would in fact be entitled to, on a file-by-file basis, would require a considerable effort and result in significant costs
the argument that the information files could not be provided by automated means was accepted as sufficiently plausible
the Group had declared its intention to request a "WHOA cooling-off period" (as referred to in Section 376 of the Dutch Bankruptcy Act) on short notice.

Examination of the three grounds given by the court in relation to the information undertakings

On the first ground, the court did not clarify the information which the Bank would not be entitled to. Given the extent of the Group’s information undertakings in the finance documents and the Bank's capacity as pledgee it seems unlikely there would be information within the files that the Bank would not be entitled to.

The second ground; that the information files could not be provided by automated means, also seems questionable due to the nature of Group’s business (which is the purchasing, selling and managing of receivables on a large scale).

The third ground is also problematic as:

a cooling-off period does not freeze the information rights of the pledgee: during such period the pledgee remains authorised to give notice of its rights of pledge to the debtors and to collect the receivables, unless the borrower provides substitute security and
the court did not state that it anticipated the Group’s request for a "WHOA cooling-off period" would be approved.

Transfer of receivables

The court granted the Bank’s request for the Group to restrain from disposing of its receivables on the condition that the Group did not request a “WHOA cooling-off period” within seven days. The court also granted the Group's request in its counterclaim to stop the Bank from enforcing its rights of pledge, as a result of the Group’s intention to request a “WHOA cooling-off period”.

This decision seems strange as a cooling-off period is not intended to be used to enable the pledgor to make enforcement of the security impossible by disposing of the pledged receivables. It is intended to temporarily prevent the pledgee from exercising its rights.

The court rejected the claimed prohibition of the sale of receivables by the Funds on the ground that, in its preliminary opinion, the receivables of the Funds were not subject to any rights of pledge in favour of the Bank. This followed from the parties' intention not to pledge any receivables owned by the Funds. Consequently, the court granted the Funds’ counterclaim for the Bank not to interfere in the sale of its receivables. However, there were receivables that were initially owned by the Group and pledged to the Bank, and subsequently transferred to the Funds, and these were not treated separately by the court. Presumably, these receivables should (continue to) be subject to the pledge in favour of the Bank until released by the Bank. The ruling did not give any indication such release had occurred.

Conclusion

This ruling shows that a court can take into account a company’s intention to file a request for WHOA proceedings and cooling-off period in a security enforcement dispute. It should be noted however that this concerns a ruling by the court in preliminary relief proceedings which can (and perhaps should) be overruled.