WHOA on its way
Adoption of WHOA by Dutch House of Representatives marks a major step toward introducing a new restructuring proceeding. The bill is now put forward to the Senate.
The parliamentary discussions in the House of Representatives on the Wet Homologatie Onderhands Akkoord (Act on the Confirmation of Extrajudicial Restructuring Plans, WHOA) concluded on Tuesday 26 May 2020 with its adoption. The WHOA introduces a pre-insolvency restructuring proceeding which is novel for Dutch insolvency law. In recent months, the legislative process has been subject to much discussion, both in Parliament and in the public domain. But, with the recent adoption by the House of Representatives, the legislative process that started some seven years ago has taken an important step forward.
Where we are now
The bill was presented last July, following several years of preparation and consultation. The WHOA is inspired by the US Chapter 11 Bankruptcy Code (Reorganisation proceeding) and the UK Scheme of Arrangements. It provides a pre-insolvency proceeding that allows for proposing a restructuring plan to (a part of) the debtor’s creditors and shareholders. If adopted by the required majority, the restructuring plan can be put forward for confirmation by a court which, if confirmed, will also bind the dissenting but affected parties. Although the WHOA is not envisaged to implement the European Directive on Restructuring and Insolvency (2019/1023), it has still been drafted in line with this Directive. Further introductions to and translations of the WHOA have already appeared in various other places (see, for instance, here and here). On 26 May 2020, the House of Representatives adopted the WHOA unanimously. A week earlier, they had already adopted several amendments to the bill.
Amendments to the bill
The bill has been amended by four amendments to the WHOA, which regard the following:
1 Security holders receive no more than the liquidation value
This is an amendment to Article 374. Holders of security rights can receive in a plan no more than the liquidation value in bankruptcy. The idea is that the reorganisation value should be attributed to all parties involved in the plan. It should promote a consensual solution among all parties. Should a secured creditor also have an unsecured claim, then it can benefit from the surplus only through this claim.
2 Ordinary SME creditors at least 20% (for trade and tort claims)
This is an amendment to Articles 374, 375, and 384(4) and which raised much discussion, both in the House of Representatives, and among academics and practitioners. The amendment provides that ordinary SME creditors should, unless there are compelling grounds (zwaarwegende gronden), receive at least 20% in cash or a right to the value of their original claim. This applies only for SME creditor claims based on trading with the debtor or tort claims.
It also states that such creditors must be grouped into a separate classes to vote on the restructuring plan. In the proposed plan, the debtor (or when appointed, the herstructureringsdeskundige (restructuring expert)) must report when this group of creditors is offered less than 20% and what the compelling grounds are for doing so.
If this 20% rule is infringed (meaning the SME creditors receive less than 20%), these dissenting creditors, if they are in a dissenting class (double requirement), may raise this as grounds to ask the court to reject confirmation of the restructuring plan. The court will reject the confirmation, unless there are compelling grounds for providing the creditor with less than 20%. The nature of this ground is far from clear in my opinion. The text leaves much discretion to the courts. The commentary to the amendment states merely that the judge will consider whether paying at least 20% was indeed not an option.
There is more detail to this new rule. For instance, it does not apply to GroupCo’s claims, ordinary (subordinated) shareholder loans, unsecured subordinated claims of financiers and bondholders. See further the amendment.
3 Cash-out payment for dissenting secured creditors
This amendment relates also to Article 384(4). Previously, it was proposed that all dissenting creditors in a dissenting class could request that the plan be rejected if they did not have the right to ask for a cash-out payment for the liquidation value of their claim. This amendment makes these grounds (and therefore the right for a cash-out payment) not available to secured creditors. When they are offered shares/certificates under the plan, they should generally be granted an alternative payment option (for instance an extension of the loan).
Finally, the last amendment introduces an evaluation of the WHOA. This evaluation will be conducted within three years of its entry into force.
Also of interest are the amendments that were rejected by the House of Representatives. These include amendments aiming to:
1 Limit the options to deviate in a restructuring plan from the Absolute Priority Rule (APR) in favour of existing shareholders (the APR regards that in redistributing the value in a restructuring plan among creditors and shareholders, there should be a strict application of the ranking of claims as applicable in bankruptcy proceedings), and
2 Introduce a generic rule stating that shareholders lose security rights obtained for their shareholder loans.
The legislative process on the WHOA will continue now as the bill is put forward for discussion and a vote by the Senate. This could possibly take place in the coming weeks or months, however, this legislative process has shown its unpredictability in the past.
Furthermore, the parliamentary discussions on the WHOA earlier this month highlighted the issue of ranking. Questions were raised and an amendment was made to change the current ranking. This regarded, in particular, the (strong) position of secured creditors and shareholder loans. The Minister of Justice stated that he was open for a normative discussion on ranking and has agreed to look into it. He announced that a study will be conducted on this topic, of which the results are expected by the end of this calendar year. Around the same time, a new legislative proposal for modernising the Dutch Bankruptcy Act is expected, which may relate also to matters of ranking. Any reforms on the ranking of creditors would impact both the ranking in bankruptcy and (when adopted) in the WHOA.
For now, it is good news that the legislative proposal for the WHOA is making progress. Dutch efforts to introduce such a proceeding have been going on for a long time. Previous discussions and proposals date back to at least the 18th century. Therefore, this adoption by the House of Representatives marks a major step for Dutch insolvency law.