Dutch Government's proposals for the introduction of a binding, pre-insolvency composition - the "Dutch Scheme"

Dutch Government's proposals for a new form of binding, pre-insolvency composition - the "Dutch Scheme"

Restructuring e-Newsletter - Global Insight Series

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In September a draft bill was published for public consultation, pursuant to which a district court may be asked to confirm a restructuring plan between a company and its creditors and shareholders concerning the rescheduling and restructuring of debts to prevent bankruptcy. Confirmation from the district court results in the restructuring plan not only binding the creditors and shareholders involved, but also creditors and/or shareholders that have not voted in favour of the composition.

This draft bill is a revision of a previously published draft and is referred to as the Court Confirmation of Extrajudicial Restructuring Plans to Prevent Bankruptcy Act (Wet homologatie onderhands akkoord ter voorkoming van faillissement, the "WHOA"). The proposal was inspired by the UK scheme of arrangement and the US Chapter 11 procedures.

The aim of the draft bill is to help to rescue operationally viable companies which are coping with excess debt and are at risk of bankruptcy, in circumstances where the proposed rescue is opposed by a small number of creditors and/or shareholders.

Main features

The WHOA provides for a relatively cheap and quick procedure to implement a composition outside of bankruptcy. If the composition is supported by the majority of creditors and/or shareholders and is approved by a Dutch court, creditors and/or shareholders which have not voted in favour of the composition will nevertheless be bound by its terms.

The debtor is obliged first to try to reach a consensual restructuring plan with its creditors and debtors. It is only entitled to consider a composition if this first step fails.

Like the English scheme, the restructuring plan can be implemented outside formal insolvency proceedings and no trustee or administrator needs to be appointed. During the entire procedure, the debtor remains in full control of its assets.

Only legal entities and professional individuals or those carrying on a business are eligible to propose a restructuring plan under the WHOA. The plan can bind all types of creditors and shareholders (including secured creditors) but is not required to include all creditors and shareholders. Thus the plan can seek to compromise the claims of only one set or specified class of creditors.

A restructuring plan should only be considered in justifiable circumstances and must therefore satisfy the following criteria: (i) effecting the restructuring plan is necessary and will provide adequate relief to avert an imminent bankruptcy of the company, (ii) there is at least one class of creditors or shareholders involved of which a large majority supports the restructuring plan; and (iii) the restructuring plan is reasonable, in the sense that the aggregate interests of the creditors and shareholders involved in the plan benefit or, at the very least, would not be prejudiced if the restructuring plan is effected. This last criterion means that (a) the creditors and shareholders may not end up in a materially worse position as a result of the restructuring plan than they would be in the event of bankruptcy and (b) the costs of carrying out the restructuring envisaged by the plan, and the consequent value to be realized from the plan (i.e. the going concern value) is fairly distributed among the various classes of creditors and shareholders.

In principle, the debtor needs to take the initiative to offer a restructuring plan to all or some of its creditors and/or shareholders. However, if a debtor faces insolvency but refuses to propose a plan despite being urged to do so by any of its creditors, the creditor can apply to court to appoint an expert who will be able to propose a restructuring plan on behalf of the debtor. An expert can also be appointed by the court if the debtor's restructuring plan has not been accepted by any voting class.

Following voting, the court must confirm the plan for it to become binding on all parties. The procedure includes a Chapter 11-style cram down mechanism, which gives the court the authority to confirm the plan, notwithstanding the objections of certain creditors.

The procedure is confidential until the court has provided its confirmation decision and includes a number of additional features, such as (i) the ability for the debtor to request a stay of insolvency proceedings and enforcement actions; (ii) the ability to set aside ipso facto clauses; and (iii) the power to terminate onerous contracts.

International context

Several years ago, when proposals were first made for this procedure, the draft bill included a provision for the procedure to fall within the scope of the European Insolvency Regulation, thus ensuring automatic recognition of its effects throughout Europe. However, the revised draft bill does not include any references to the Insolvency Regulation. No explanation is provided, although it could relate to the desire for the procedure to be able to cram down the claims of secured creditors which could conflict with the "rights in rem" provisions of the Regulation. Whether this is the case or not, with no reference to the Regulation, it is now unclear what connection to the Netherlands is required in order for a debtor to be authorized to initiate the WHOA procedure. Ideally, this will be addressed in the final draft bill.

The revised draft bill was open for consultation until 1 December 2017 and will hopefully soon be submitted to parliament.