Draft bill introduces pre-insolvency proceedings in the Netherlands

As a development in the legislative program ‘Recalibration of Bankruptcy Law’, the Dutch legislator seeks to introduce pre-insolvency measures in the Netherlands. It is intended that it will be possible in the Netherlands to restructure distressed companies through a compulsory composition.

On 5 September 2017 the Dutch legislator has started a public consultation procedure of the draft bill on the introduction of the possibility to confirm a private restructuring plan in order to prevent bankruptcy. This draft bill is an updated version of the draft bill Continuity of Enterprises Act II, which bill was in public consultation in 2014.

The essence of the draft bill

The draft bill provides for an (private) composition or restructuring plan between a debtor on the one hand and its creditors and shareholders on the other hand regarding the restructuring of the debts of the debtor. Subsequently, the court may confirm such composition or restructuring plan. As a consequence of such confirmation the restructuring plan will become binding for all persons involved – creditors and/or shareholders. Creditors and/or shareholders that have voted against the restructuring plan, can be forced to accept the restructuring plan. Such compulsory composition may prevent a bankruptcy.

In particular, a compulsory composition offers a solution for companies that have profitable business activities, but are in danger of becoming insolvent due to heavy debt burdens. The proposed compulsory composition, however, cannot modify the rights of employees arising out of employment agreements. It is important to note this, since obligations towards employees can significantly contribute to a heavy debt burden of the debtor (with often results into a bankruptcy).

The draft bill is applicable to legal persons and natural persons exercising an independent profession or a business. Banks and insurers are explicitly excluded from applicability. Inspired by the English scheme of arrangement and the American Chapter 11 procedure, the content of the draft bill can be summarized as follows:

a. Preliminary step: draft-plans, negotiations and voting

• A debtor may – at its own initiative or at the request of a creditor – propose a restructuring plan to (a part of) his creditors and his shareholders, when he foresees that cannot continue to pay his debts as they fall due.
• Under circumstances, a creditor may request the court to appoint an expert who will have the right – to the exclusion of the debtor – to propose a restructuring plan. The debtor has to, whether asked to do so or not, provide all information and cooperation to the expert.
• A restructuring plan may modify the rights of ordinary creditors, preferred creditors and secured creditors as well as the rights of shareholders (e.g. a debt for equity swap).
• Creditors and shareholders can or must be placed in different classes. It is possible to propose a restructuring plan to only one class of creditors or shareholders.
• Also rights of sureties and fellow debtors against the debtor and the rights of creditors against such sureties and fellow debtors may be modified in a restructuring plan. This creates the possibility to restructure a group of companies at once.
• Next to existing debts, also future obligations that arise from current executory contracts may be restructured through a compulsory composition.
• The debtor is in principle free to determine the contents and layout of a restructuring plan, but to be able to propose a compulsory composition, the contents and layout of a restructuring plan have to meet several formal requirements.
• Creditors and shareholders whose rights are modified on the basis of the restructuring plan, have the right to decide on the restructuring plan by way of voting.
• A class of creditors has consented to the restructuring plan where the decision granting consent has been taken by a group of creditors that in aggregate represents no less than two thirds of the total amount of claims belonging to the creditors that cast their vote within that class.
• A class of shareholders has consented to the restructuring plan where the decision granting consent has been taken by a majority of no less than two thirds of the number of votes cast.
   

b. The next step: court involvement

• If at least one class consented to the restructuring plan, the debtor may file a request with the court for confirmation of the restructuring plan.
• Creditors and shareholders who voted against the restructuring plan may file with the court an application in which they set out the grounds on which they believe confirmation has to be denied.
• When all classes of creditors and shareholders have consented with the plan, the court shall – at the request of one or more dissenting creditors and/or shareholders – refuse the confirmation of the plan, inter alia, where:
  • The performance of the restructuring plan has not been sufficiently safeguarded;
  • The contents and the layout of the restructuring plan and/or the voting process do not meet the formal requirements;
  • A creditor or a shareholder would receive less under the restructuring plan than he would have received upon a liquidation of debtor’s assets in bankruptcy (the  best interest of creditors test);
  • The restructuring plan has been concluded fraudulently;
  • Other important reasons exist that oppose confirmation.
     

• When not all classes of creditors and shareholders have consented with the restructuring plan, the court will refuse confirmation of the plan where an application to that effect has been filed by one or more creditors or shareholders who themselves voted against the restructuring plan and who were placed in a class that did not consent to the plan and such class consists of:
  • Creditors or shareholders who would receive rights under the restructuring plan that have a value that is lower than the amount of the claims or the nominal amount of the shares for which they should have been allowed in that class, while there are one or more lower ranking classes of creditors or shareholders who receive or retain rights under the restructuring plan, unless those rights constitute arm’s length consideration for the provision of a new loan or new capital (the absolute priority rule);
  • Creditors or shareholders who would receive rights under the restructuring plan that have a value that is lower than the amount of the claims or the nominal amount of the shares for which they should have been allowed in that class, while there are one or more higher ranking classes of creditors or shareholders who would receive rights under the restructuring plan that have a value that is higher than the amount of the claims or the nominal value of the shares for which they should have been allowed in that class (the not more than 100% rule);
  • Creditors or shareholders who would receive rights under the restructuring plan that, without reasonable ground, have a value that is comparatively lower than the value of the rights which another class of equally ranked creditors or shareholders would receive under the restructuring plan;
  • Creditors or shareholders whose rights are modified on the basis of the restructuring plan, while there are other creditors or shareholders with an equal or lower rank who, without reasonable ground, remain outside the restructuring plan, or;
  • Creditors who under the terms of the restructuring plan do not have the right to opt for a payment in the form of cash in an amount equal to the amount that they could reasonably expect to receive upon a liquidation of the debtor’s assets in bankruptcy.

Finally, the draft bill introduces several additional measures, such as a cooling off period, a stay of a bankruptcy request, the ability to set aside ipso facto clauses and the right for the debtor to request the court to give binding early determinations on matters of dispute such as jurisdiction, class formation or valuation.

Enhancing the possibilities for corporate restructuring

Within the legislative program ‘Recalibration of Bankruptcy Law’ the draft bill – like the legislative proposal Continuity of Enterprises Act I – intends to enhance the possibilities for corporate restructuring. The purpose of the Continuity of Enterprises Act I is to provide a statutory footing to the Dutch practice of pre-packs, as indicated in a previous legal alert. Although the Court of Justice of the European Union has held that the rules on Transfer of Undertakings (Protection of Employment) (TUPE) apply to a transfer of undertaking in a pre-pack situation, the Dutch Minister of Justice and Security has indicated (in Dutch) on 28 September 2017 that the Continuity of Enterprises Act I still has added value.

The public consultation procedure on the draft bill has started on 5 September 2017 and will end on 1 December 2017 and can be found here. Interested parties may provide their input to the Dutch legislator during such consultation procedure. Next, the (amended) draft bill will need to be approved by the Dutch Lower House and Upper House before it will enter into force.

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