17 December 2020

Temporary arrangements forpayment deferral take effectto help companies hit bycrisis

Niek Biegman
Menno Stoffer
Ferdinand Hengst
+ 4 other experts
The Dutch government has introduced legislation to prevent companies that are in distress as a result of the Covid-19 pandemic from going bankrupt. The Temporary Deferral of Payments Act 2020 aims to support these companies through a set of measures that can be invoked by these companies under certain circumstances. Even creditors that have not filed a petition for bankruptcy against the company may still face temporary arrangements, as the act allows the company to seek a preliminary court order suspending any enforcement action or lifting any attachments made by creditors. The act entered into force today. In this article we reflect on the temporary measures and how they may limit enforcement by creditors.

Background

The Covid-19 pandemic and the related government restrictions have severely affected the economy. Affected companies have navigated these uncertain times in a variety of ways, including: agreeing with their lenders to certain amendments and waivers of their financing agreements; ensuring adequate levels of liquidity through government support schemes; drawing under their revolving credit lines; and turning to the debt capital markets. So far, Dutch companies have found contracting parties (including lenders) to be relatively flexible in granting payment holidays. In addition, Dutch courts have adopted temporary guidelines that allow the pandemic and the state of the economy to play an important role in a court's decision whether or not to declare a company bankrupt. Consequently, the number of bankruptcies has been low since the start of the crisis. Despite all of these efforts, these liquidity measures may be inefficient or at some point, no longer available. As such, in the coming months, more businesses in the Netherlands are expected to face liquidity or continuity problems as a result of the pandemic. The new legislation aims to protect Dutch companies (except for financial institutions, insurance companies, or investment funds) that are facing these problems and to allow them to continue on a going-concern basis once the government restrictions have been lifted. The act seeks to discourage creditors of affected companies from using a bankruptcy filing as an instrument to force payment of their claims. To ensure that debtors do not use the measures in a disproportionate manner, the court, when ruling on a request from a debtor to impose the measures, will weigh the interests of both the debtor and the creditor.

The measures

Suspension of bankruptcy petition and temporary stay Under the legislation, the debtor can ask the court to grant a temporary stay and suspend a creditor's petition for bankruptcy for two months (subject to extension). The court could award such a request if:
  • the debtor is temporarily unable to meet its payment obligations as a result of a temporary lack in liquidity exclusively or primarily caused by the pandemic or related government restrictions;
  • the debtor's prospects of continuing to pay its debts after the temporary stay period lapses, are positive; and
  • the creditor petitioning for the debtor's bankruptcy is not substantially and unreasonably prejudiced by the temporary stay.
Measures for creditors filing the bankruptcy petition A temporary stay only applies for creditors filing a petition for the debtor's bankruptcy and only for creditor debts which became due and payable before the temporary stay period. In addition, creditors filing for the debtor's bankruptcy cannot amend, terminate or suspend the agreement with the debtor during the temporary stay period if solely based on the debtor being in default under the agreement before the temporary stay period. If requested by the debtor, the court may also temporarily prohibit creditors filing a petition for the debtor's bankruptcy from enforcing any security rights over debtor assets without court approval. Finally, the court may lift any attachments levied by creditors filing a petition for the debtor's bankruptcy during the temporary stay period. Measures for other creditors In addition, where necessary for continuity of business and subject to the same conditions applying to the request for suspension of the bankruptcy petition, debtors may in preliminary relief proceedings request that the court: (i) lifts attachments, (ii) suspends claims made against assets under the control of the debtors, or (iii) suspends enforcement action. In each case, debtors can make this request for any relevant creditor, provided that the creditor has not filed a petition for that debtor's bankruptcy. This means that debtors can request these measures where another creditor has filed a petition for that debtor's bankruptcy, and also in a scenario where no bankruptcy petition has been filed at all. As a result, this act could hinder any creditor that has commenced enforcement action or levied attachments.

Will the measures be effective?

It remains to be seen whether the Temporary Deferral of Payments Act is actually necessary and effective in limiting the number of Covid-related bankruptcies in the Netherlands, especially as the number of bankruptcies has been low since the start of the pandemic. This has most likely been as a result of a combination of: (i) various government support schemes, (ii) courts' hesitation in declaring companies bankrupt, and (iii) existing market practice of creditors granting payment holidays to their debtors. Moreover, this legislation is only expected to be available for one and a half months, as it is set to terminate on 1 February 2021 (unless extended).