Lending focus – June 2021 – 2 / 6 观点
Following the introduction of the Dutch Court Approval of a Private Composition (Prevention of Insolvency) Act (the WHOA), the first court approval for a private composition was granted on 19 February 2021.
The new Dutch legislation forms part of the Dutch Bankruptcy Act and has been in force since January 2021. The WHOA aims to prevent a company from being declared bankrupt while it is still (partially) viable. Companies, their creditors and shareholders can – in the event of imminent bankruptcy – enter into a binding private agreement whereby debts are extinguished following partial payment of those debts.
If the court approves an agreement, it will apply to all creditors: dissenting creditors will be forced to accept the agreement, settling for partial payment of their claims.
The court will only approve the agreement if it meets all WHOA requirements.
The case before the Dutch court involved a company that provided light shows at large events like music festivals. As a result of COVID-19 and government measures, the company immediately ceased operations as of 15 March 2020. Prior to suspension, the company was profitable.
The company and its parent company had already carried out a reorganisation but were unable to pay 121 creditors. They sought the court's approval for a proposed debt restructuring.
Under the WHOA, the creditors were grouped into different classes:
The bank was willing to provide a EUR 350,000 loan to the company, to be secured by certain pledges. Unsecured creditors would be paid 16% of their claims, the Dutch tax authorities would be paid 21% of their claims, and the person with a right of retention (on the inventory) would receive a payment of EUR 139,000 plus 16% of its remaining claim (as unsecured creditor). Additionally, a current lease agreement would get terminated. In return the company and its parent company jointly asked the creditors to waive the remaining debts following partial payment of the debts (the Agreement).
Most of the creditors agreed to cooperate with the Agreement, but unfortunately not all. The company therefore asked the court to approve the Agreement to force the refusing creditors to cooperate.
The general principle under the WHOA is that an agreement is offered separately for each company involved. In this case, however, the court was being asked to approve an agreement proposed by both the debtor company and its parent.
The court explicitly confirmed that the Dutch Bankruptcy Act does not offer the possibility of a combined agreement for the debts of multiple companies that are not jointly liable. Nevertheless, the court approved the (combined) agreement in this case, considering that:
Finally, the court explicitly stated in its ruling that it had applied flexibility in coming to its decision, as this was the first request for court approval of a private composition under the WHOA.
The general grounds for rejection are stated in Section 384(2) of the Dutch Bankruptcy Act and must be considered by the court.
The court concluded that the applicants' proposal was reasonably credible and documented, so it passed the relevant test for approval. The court accepted that the applicants would not be able to continue paying their debts and that bankruptcy would be the only alternative, if no settlement could be reached.
The court also concluded that there had been a proper decision-making process. The creditors were duly notified, had the opportunity to vote on the matter and were informed of the date on which the court hearing for the approval of the private composition would take place.
Given that one of the unsecured creditors asked the court to reject the approval of the private composition, the court was required to consider this in accordance with the exceptional ground for rejection provided by Section 384 of the Dutch Bankruptcy Act.
Under Section 384(3), opposing creditors can always invoke the principle of "no creditor worse off" to prevent the approval of the private composition. However, the court ruled that this request for rejection could not succeed because the opposing creditor would be financially better off under the proposed settlement than in the event of the companies' liquidation.
Although the WHOA is a piece of complex legislation, this first decision is encouraging. It shows that the Dutch courts can navigate the new rules successfully and pragmatically.
The decision provides a good example of a quick and effective procedure for small and medium-sized companies in financial distress and, as such, it appears that the WHOA serves its purpose well.
To discuss the issues raised in this article in more detail, please reach out to a member of our Banking & Finance or Restructuring & Insolvency teams.
作者 Kate Bowden