Act on the Confirmation of Private Plans (WHOA)
As of 1 January 2021, the Act on the Confirmation of Private Plans (in the Netherlands: de Wet Homologatie Onderhands Akkoord or WHOA) has entered into force. The WHOA originated from the need to give companies that encounter financial difficulties outside bankruptcy more leeway to restructure by requiring creditors (and other stakeholders, including for example shareholders and financiers) to cooperate in a private compulsory arrangement. The underlying idea is that the situation of the parties concerned in case of bankruptcy should be compared to the situation brought about by a possible invocation of the WHOA. In general, it should be assumed that the reorganisation value obtained outside bankruptcy often exceeds the liquidation value obtained in the event of a bankruptcy. All in all, this is also believed to be of benefit to the creditors. Especially in times like these, when many companies have fallen on hard times due to the Covid-19 pandemic1), the WHOA can help purge the debts of viable companies.
The WHOA was partly inspired by the American Chapter 11 procedure and the British Scheme of arrangement. In practice, large companies sometimes relocated their registered offices outside the Netherlands, temporarily or otherwise, to allow for a successful restructuring of debts. Today, Europe has also urged its member states to adopt appropriate debt restructuring regulations based on Directive 2019/1023. The WHOA is not a direct result thereof, but is largely compliant with the Directive.
Condition for invoking WHOA
The main condition for invoking the WHOA is to prove that it can be reasonably assumed that the debtor cannot continue to pay his debts as they fall due (Article 370, paragraph 1 BA). Alternatively, the debtor is able to fulfil his obligations in the short term, but there are no realistic prospects for the future and therefore the restructuring is initiated in anticipation of that moment.
Declaration regarding the preparation of an arrangement 2)
The procedure starts by submitting a declaration stating that an arrangement is being prepared (Annex 1 of the procedural regulations regarding the WHOA). Not only the debtor, but also a creditor, shareholder, the works council or a workplace representative may ensure that the WHOA is entered into force for a certain debtor. The main difference being that these stakeholders can only offer an arrangement via a restructuring expert appointed by the court (Article 371, paragraph 1 BA).
The debtor, and the stakeholders mentioned above, may request the court to appoint a restructuring expert. This will often be done to avoid any conflict of interests and to ensure the creditors trust that a feasible arrangement will be offered on good grounds. In principle, the court will grant any such request to appoint a restructuring expert.
When submitting the declaration regarding the preparation of an arrangement, the court may also be requested to order a cooling-off period to allow the company some time to continue its operations and to force an arrangement without individual creditors recovering the assets of debtor. The cooling-off period may also include a suspension of payment, a bankruptcy petition and the lifting of any attachments against debtor.
Freedom in establishing an arrangement
Under the WHOA, the debtor offering an arrangement has a great deal of freedom in establishing the arrangement to be offered. The arrangement does not necessarily have to stipulate the payment of a specific amount to creditors, but may also, for example, lay down that the current agreements have to be amended or that (part of) the debt has to be converted into share capital. The rights of creditors and (or) shareholders will be amended by the arrangement to be offered.
The WHOA has far-reaching effects. Careful consideration has therefore been given to the tools that need to be provided to bind creditors and shareholders to an arrangement without allowing them to oppose the arrangement too easily, while ensuring the appropriate guarantees of course. For example, it is possible under the WHOA to limit the rights of shareholders. This is reflected in the provision stating that the resolution to be adopted by the GMS regarding the issue of new shares may be disapplied (Article 370, paragraph 5 BA). Obviously, the purpose of all this is to be able to offer an arrangement even if it is against the will of the shareholders, and to provide a solution, if, for example, a debtor chooses to create a class of creditors and the debts are converted into share capital (the so-called “debt for equity swap”). In that context, the statutory preferential right of existing shareholders can also be limited for the new shares to be issued (Article 370, paragraph 5 BA), to basically prevent them from opposing the arrangement.
The arrangement and the associated classification
The fact that the (various) creditors can be placed in different classes also makes the WHOA a seemingly workable instrument. However, it is important that the reason for the classification is explained. After all, the court will also take such classification into account when the arrangement is ultimately submitted for approval (compliance creditors). If the court finds that the classification cannot be justified, the request for approval may be rejected. The WHOA also seems to have a practical approach in this respect: it is possible to ask the court for its opinion regarding a certain classification beforehand (in the initial stage) to avoid any surprises when submitting the request for approval later on.
Hence, this freedom also allows the debtor to strategically place the creditors in different classes and thus increase the chances the arrangement will succeed. Each class may receive a different proposal and voting on the arrangement shall be done separately by class.
In principle, SME creditors must be paid at least 20% of their claim under the arrangement. However, special arrangements have been made for cases where the aforementioned percentage is not achieved (Article 374, paragraph 2 DCC). If any creditors (1) are subject to the SME restructuring plan – such as all companies as referred to in Article 395a and 396 Book 2 DCC, and all self-employed persons and sole proprietors (who employ less than 50 employees) – (2) have a claim regarding any goods or services delivered or a tort claim, and (3) are paid less than 20% of the claim under the arrangement, such creditors must jointly be placed in one or more separate classes. Meaning that the SME creditors shall vote separately from the other creditors and shareholders and, if they so wish (in case of dissenting votes), they may invoke the relevant grounds for refusing the approval.
Any creditors with a right of pledge or mortgage must also be placed in a separate class (Article 374, paragraph 3 BA). Article 375 BA states the information to be provided to the creditors and shareholders with voting rights to allow them to be sufficiently informed before the vote. The arrangement to be offered includes, for example, a statement of all income and expenses, information regarding the debtor’s financial position, a description of the cause of the financial difficulties, the restructuring measures that are part of the arrangement and the manner in which such measures contribute to a solution (Article 375, paragraph 2 BA).
Any employees’ rights arising from an employment contract cannot be amended (Article 369, paragraph 4 BA). Hence, the WHOA does not apply to any employees and their employment contracts.
Amendment of agreements
With respect to any long-term (continuing performance) agreements, the WHOA again has potentially far-reaching effects. A proposal to amend or terminate the agreement may be submitted to the party with whom the debtor has concluded the agreement. If the party in question does not agree with the proposal, the court can be requested to approve the unilateral termination of the agreement in question, regardless of the stipulations laid down hereon in the agreement itself. Meaning that an agreement that cannot be terminated prematurely, is nevertheless terminated prematurely. Subsequently, the debtor can include the claim for damages in the restructuring plan proposed in the arrangement, to which claim the other party is entitled after the termination.
Voting on arrangement
When determining the result of the vote, only the votes actually cast are taken into account. Meaning that creditors who refrained from voting are not included when calculating the group of creditors who jointly represent at least 2/3 of the total amount of claims within a certain class of creditors. An arrangement adopted by the creditors may be submitted to the court if at least one class of creditors has agreed to the arrangement (cross-class cram down).
Cross-class cram down
As stated above, a debtor who has placed the creditors in multiple classes can already request approval if at least one class has agreed to the arrangement (Article 383 BA). Meaning that if the creditors from one class (2/3 majority) consent to the arrangement, all creditors from the other classes are bound to the submitted arrangement by means of the approval. However, such approval is subject to one condition: the creditors in question are expected to obtain satisfaction in full or at least in part in case of bankruptcy. In other words, the creditors in that class must in fact be in “the money”, which they are if they would also obtain satisfaction in whole or in part upon liquidation or bankruptcy. Therefore, the cross-class cram down option is also something to consider when creating a (strategic) classification.
Approval of arrangement
After the vote, a request for approval will generally be submitted. The basic principle is that an adopted arrangement will in principle also be approved, unless there are general grounds for rejection (Article 384, paragraph 2 BA) or specific grounds for rejection (Article 384, paragraph 3/4 BA). The debtor and all creditors with voting rights are bound by the approved arrangement. Meaning that the arrangement also works against a creditor with voting rights who has refrained from voting. An approved arrangement cannot be annulled. And the arrangement itself will contain a provision stipulating that the arrangement cannot be dissolved.
The WHOA is not only intended for companies that continue their business operations after restructuring of their debts. The act can also be invoked to discontinue business activities in a controlled way and to wind up the company. If all conditions for invocation of the WHOA are met, a discontinuation of the business operations outside bankruptcy is also possible, which enables a company to keep the bankruptcy administrator at bay and to avoid being left with a residual debt.
WHOA limits uncertainty regarding funding of restructuring plan
In addition, the WHOA provides financiers more security in order to rescue the company. For example, it has been legally defined that funding through securities and with the authorisation of the court is not fraudulent (Article 42a BA). This should result in financiers being more willing to provide additional funding under the WHOA, because they do not need to fear a possible successor bankruptcy administrator. In that context, clarity has also been created with regard to set-off, whereby it has been determined that set-off in the context of WHOA funding (funding of the continuation of the business) is done in good faith and cannot be affected (Article 54, paragraph 3 BA).