Summary

The Act on the Confirmation of Private Plans [Wet Homologatie Onderhands Akkoord] (‘WHOA’) introduces a pre-insolvency plan procedure in Dutch law. Such a procedure enables a financially distressed company to restructure its debts. If a court confirms a restructuring plan, creditors and shareholders may be bound by it against their will. Such a ‘cram down’ amounts to an interference with the right to the peaceful enjoyment of one’s property and conflicts with the longstanding principle of pacta sunt servanda. A pre-insolvency plan procedure therefore requires proper substantial and procedural safeguards to protect the legitimate interests of the capital providers (both creditors and shareholders) involved.

This thesis contains a critical assessment of the WHOA in light of the American Chapter 11-procedure, the English and Singaporean scheme of arrangement and the European Restructuring Directive. Three research inquiries are set out in Chapter 1. First of all, the position of a pre-insolvency plan procedure within the range of currently available reorganisation tools under Dutch law is determined. Secondly, the underlying principles which a legal regime governing pre-insolvency plans would need to comply with are examined. Thirdly, an assessment will be made as to the extent to which the WHOA complies with those principles and how this new instrument may be incorporated into Dutch (insolvency) law.

Amongst other things, Chapter 2 discusses the differences between financial and operational, and informal and formal reorganisation, as well as the difference between restructuring within or outside the relevant legal entity. The limited potential for restructuring within the current formal Dutch insolvency procedures is considered. The suspension of payments procedure, which was originally designed to serve as a restructuring procedure, is rarely successful in serving this purpose. However, the Dutch bankruptcy proceedings (focussing on the liquidation of assets) are used to restructure businesses by way of a sale of (parts of) the business as a going concern. As a result of such a transaction valuable parts of a business can be transferred going concern to another party. Given the limited potential for restructuring under current Dutch insolvency law, informal reorganisations play an important role in the Dutch restructuring practice. The most important disadvantage of informal reorganisations is that usually consensus is required to implement a restructuring plan. Without the intervention of a court or the legislature it is nearly impossible to compel hold out capital providers to participate in a reasonable restructuring plan.

Chapter 3 covers the lengthy history of pre-insolvency plans. The historical overview reveals that the debate concerning the need for or benefit of a (court-imposed) restructuring plan to avoid insolvency has been ongoing for almost two centuries. Current Dutch law permits various types of arrangements ranging from private agreements to insolvency plans. The main elements of these procedures are discussed. It follows from this discussion that there is a lacuna in Dutch law. After all, outside the scope of suspension of payments and bankruptcy no appropriate solution is available for the hold-out problem, even though the hold-out behaviour may result in the destruction of value, which is detrimental to the joint capital providers. Only in very exceptional circumstances a court may order a creditor to cooperate in implementing a restructuring plan (on the basis of the doctrine of abuse of rights, article 3:13 DCC). Legal practice has gone in search of alternatives to address this lacuna. Via the typically Dutch right of inquiry (enquêterecht), through ‘bankruptcy tourism’ or by way of enforcing a right of pledge on shares, it is possible to impose a restructuring on out of the money capital providers.

The principles underlying a pre-insolvency plan procedure outside the scope of suspension of payments or bankruptcy are dealt with in Chapter 4. The principles which have been formulated can be broken down into three categories.

The first category of principles pertains to the fundamental question as to when – in abstract terms – a plan may be imposed upon capital providers. The first principle stipulates that a restructuring plan must yield added value for the joint capital providers . They must be better off under the restructuring plan than they would be in alternative scenarios (such as insolvent liquidation). As a minimum safeguard, capital providers may not be worse off than in the most likely alternative scenario, which would be liquidation of the debtor’s assets in bankruptcy proceedings in many cases (principle 2). This ‘best interests’ principle appears to be a universal guarantee, which may also be linked to Article 1 of the First Protocol to the European Convention on Human Rights. A third basic principle is that the value that can be retained or realised under the plan must be distributed amongst the capital providers in accordance with the relevant order of priority. As such, the confirmation of a restructuring plan may be deemed to constitute a ‘day of reckoning’. Under the terms of such a plan the capital providers essentially have recourse against the value of the restructured company, albeit that that value is usually paid out in kind and not in cash. From the notion that the restructuring value must be divided in accordance with the relevant order of priority, it follows that it must be possible to bind all types of creditors and shareholders to a restructuring plan. Fourthly, the pre-insolvency procedure must be available at an early stage. However, it is crucial that a debtor is in such a position that – with­out the plan – it seems impossible to avoid insolvency. As long as this is not the case, there are no grounds to deprive capital providers of the right to take recourse on the debtor’s future earning capacity. The fifth principle is that the contents of any restructuring plan must be commensurate with the restructuring which is envisaged.

The second category of principles relates to the judicial, autocratic and democratic aspects of a pre-insolvency plan procedure. The sixth principle is that a debtor must continue to hold powers of administration and disposition during the restructuring process. The debtor will retain control over the relevant business in its capacity as a debtor in possession (‘DIP’). In accordance with the seventh principle, a vote on the proposed restructuring plan must take place in classes of capital providers. Voting on a plan in classes of capital providers with similar positions makes it possible to produce a detailed and democratic determination of the support for the plan. Access to a specialist judge is of the utmost importance in a proper governance structure within the pre-insolvency plan procedure. The judge ultimately decides whether the alteration of the rights of the capital providers is fair (principle 8).

The third and final category of principles is prompted by the desire that the pre-insolvency procedure should be flexible, practical and efficient, as well as eminently feasible for the purposes of legal practice. Any statutory pre-insolvency plan procedure must contain measures to retain the value of the business to the extent possible during the procedure (principle 9). The tenth principle is that the procedure must be flexible in itself. The same must apply with regard to the substance and scope of the plan. Finally, deal certainty is of great importance for the parties involved in a pre-insolvency plan procedure (principle 11), the procedure must be fast (principle 12) and must simultaneously provide guarantees against its misuse (principle 13).

Chapter 5 considers various matters pertaining to the commencement of the pre-insolvency plan procedure. The aspects that are discussed in this chapter illustrate how flexible the Dutch pre-insolvency plan procedure is.

For instance, the WHOA entails a choice between a private or public procedure, providing for a bespoke solution. The court may be involved as soon as the proposer of the plan deems it beneficial for this to occur. As such, the plan proposer may petition the court to hand down an interim judicial ruling on any of such aspects which are important for the purpose of concluding the plan. The debtor will continue to hold powers of administration and disposition during the process. Nevertheless, an observer may be appointed in order to ensure that a ‘DIP’ does not abuse this discretionary power.

Granting capital providers the right to take the initiative serves as an incentive for (early) restructurings that maximise value and distribute this value fairly. The WHOA contains an indirect right to take initiative for capital providers. They may apply for the appointment of a restructuring expert, who will then prepare a restructuring plan. However, as the Dutch legislator decided to align the WHOA with the Restructuring Directive, the effectiveness of this right to take initiative has been diminished. For instance, in the case of an SME debtor a restructuring expert always requires the management board’s consent to propose a plan, which could give rise to a new hold-out problem.

The WHOA also provides for an optional court ordered stay of enforcement actions and a limitation of the right to invoke ipso facto clauses. Similarly, it provides for the debtor to retain contractual powers of use and disposal in respect of encumbered or third-party owned assets. These supporting measures are closely related to efforts to retain a business’ value as a going concern as far as possible during the pre-insolvency procedure. The WHOA provides for a substantial number of safeguards, which should be able to avoid any unreasonable interference with creditors’ proprietary rights. These safeguards contain open standards, which enable a court to achieve a balanced outcome in a specific case.

Chapter 6 focuses on classification. A class-based vote may provide democratic justification for a restructuring plan. The classification criterion determines which capital providers are placed into the same class. A comparison with English and American law reveals that certain features of the pre-insolvency plan procedure may also be important for the purposes of classification, such as the availability of a ‘cross class cram down’ or the requirement that at least one class must vote in favour of the plan. The criterion stipulated in the WHOA closely resembles the standard for classification in a scheme of arrangement. What is crucial is whether the rights of the capital providers differ to such an extent that they are not in a comparable position. In this respect two factors are relevant. In the first place, significance should be accorded to the rights which capital providers have in an alternative insolvency scenario. Secondly, the rights they acquire by virtue of the plan must be considered. As such, the ranking of claims is a crucial factor for classification purposes.

Chapter 7 explores the limitations of the content of a restructuring plan. Since a plan may be viewed as a multi-party agreement of a special nature, contractual freedom is paramount. In addition, the proposer of a WHOA plan is at liberty to confine the plan to specific classes and to propose to treat various classes differently under the plan. The WHOA may also be used to release or restructure guarantees issued by group companies. All of this makes a WHOA plan a flexible instrument which may be tailored to address specific restructuring requirements. The regime governing the amendment and cancellation of agreements is discussed at the end of Chapter 7. This regime makes it possible for a debtor (subject to court approval) to terminate any agreement if the other party to the contract refuses a proposal to amend the contract. In such a case the contracting party is entitled to compensation on the grounds of such termination, but this claim for damages may be restructured in the plan.

Chapter 8 focusses on the voting procedure. Flexibility and speed are key concepts in this part of the pre-insolvency plan procedure as well. The legislature has largely left the voting procedure in the plan proposer’s hands. A role has been assigned to the courts, for example, when a dispute arises concerning the value of a creditor’s claim for voting purposes. After all, the requisite majority is merely determined on the basis of the value of the claims in each class. A plan is approved by a class when those voting in favour of it represent two thirds of the total value of the claims or shares of those capital providers who cast a vote in that class.

The confirmation stage constitutes a crucial part of the pre-insolvency plan procedure. An application for court confirmation of the plan may be submitted in the event that at least one (in the money) class consents to a restructuring plan. Chapter 9 considers the various grounds for courts to decline confirmation. For example, a court may deny confirmation ex officio, for example, if the required state of pre-insolvency is not present or if fundamental errors have occurred during the voting procedure. At the request from a party that has voted against the plan, a court will deny confirmation should it appear prima facie that the relevant capital providers are worse off under the plan than they would have been in a liquidation of the debtor’s assets in bankruptcy. This ‘best interests’ test represents a fundamental guarantee for individual capital providers. The WHOA also provides for the possibility of imposing a restructuring plan on a class that has not accepted the plan, a so-called cross class cram down. The WHOA includes a twofold safeguard for such a far-reaching measure. In the first place, a dissenting class cannot be bound to the plan if the plan does not provide for a distribution with a value equal to their share, in accordance with their rank, of the reorganisation value. The WHOA allows derogations from the order of priority when there are reasonable grounds for doing so and the affected capital providers are not prejudiced by it. This inventive variant of the American absolute priority rule offers capital providers protection against any disproportionate infringement of their rights without being excessively rigid. Secondly, creditors in a dissenting class may claim a cash payment equal to their share, in accordance with their rank, of the liquidation value. This cash out right, which is unique when viewed from an international perspective, represents a far-reaching safeguard. Time will however tell what effect this right to opt out will have on negotiations concerning a restructuring. The WHOA precludes any legal remedies. This decision can only be justified if specialist judges assess WHOA-related applications. As such, the initiative to establish a WHOA pool represents an important step in the right direction.

Finally, the legal implications of confirmation are discussed in Chapter 10. The precise legal implications are closely related to the substance of the restructuring plan in question. A confirmed plan is binding on all capital providers who are entitled to vote. For reasons of deal certainty, a confirmed restructuring plan may not be annulled. The plan itself may also preclude cancellation of the relevant restructuring plan.

In the concluding observations, it is set out that the WHOA largely conforms to the principles which have been formulated in Chapter 4, and that the new statutory procedure can be applied in accordance with those principles. The Dutch legislature has designed a highly flexible pre-insolvency plan procedure which devotes adequate attention to the legitimate interests of the capital providers involved.