17 March 2021

The WHOA in practice: with greater clarity, come teething problems

On 1 January 2021, the Act on Court confirmation of extrajudicial restructuring plans (WHOA) came into force. Also known as the "Dutch Scheme", this new tool allows financial restructuring outside of insolvency proceedings. If certain formalities are met, courts can confirm an extrajudicial restructuring plan, making it binding on all affected creditors and shareholders regardless of their vote on the plan.

The WHOA has been a long time in the making and is widely welcomed, especially considering the economic challenges imposed by the COVID 19 crisis. It was therefore no surprise that the first court requests under the WHOA were filed at the start of 2021, as soon as the law took effect. Since then, fourteen court orders have been handed down in a variety of cases. In these decisions, a pool of specialised “WHOA judges“ provide guidance on the interpretation of the WHOA. We discuss three important practical lessons that can be learned from the court decisions to date.

Group restructurings require one plan per debtor

In large-scale group restructurings, restructuring the obligations of several group entities via one restructuring plan is common. Typically, the total debt of these entities is taken into account when calculating the offer made to the various creditors under that plan. The funds required for the restructuring often consist of a lump sum for the group, rather than being calculated for, and allocated to, each group entity. It is general practice in international restructurings to offer one comprehensive restructuring plan to all affected creditors, regardless of which specific entity owes them money. As creditors are often not even aware which exact entity is their debtor – but rather regard the group as such – this way of designing a restructuring plan is pragmatic and makes a restructuring simple and manageable.

It was therefore unsurprising that the first restructuring plan confirmed by a court in accordance with the WHOA offered one plan. In this case, the holding and its subsidiaries had presented their creditors with one plan that consolidated all of the companies' assets and liabilities. The Noord-Holland District Court did not allow this, arguing that the Dutch Bankruptcy Act (of which the WHOA is part) does not provide for comprehensive restructuring plans. The court nevertheless confirmed the restructuring plan for three reasons: (i) it must have been clear to all creditors that the plan consisted of two plans; (ii) it must have been clear to all creditors that the plan related to all debts of the holding and its subsidiary; and (iii) to the extent no clear distinction was made between the assets of the debtors, this was sanctioned by all classes of creditors approving the plan (and, in the case of the holding, all creditors).

Lesson learned: although one plan may be offered to all creditors affected by a group restructuring, the offer has to be itemised for each specific group entity.

Unequal treatment of ordinary creditors is allowed for the benefit of financing the restructuring effort (DIP financing)

The WHOA allows a debtor (or plan expert, if any) to design the restructuring plan in any way it deems fit. The debtor is free to choose which claims to include and which ones to leave unaffected. If creditors with equal rights (that is: belonging to the same ranking) are treated unequally in a restructuring plan, that plan can still be confirmed by the court if it has been approved with the majority consent of the creditors in the class that is worse off. If there is no majority, the plan can only be confirmed if there is a reasonable ground for the unequal treatment, and this does not harm the interests of the creditors affected. If opposing creditors are worse off than they would be in bankruptcy liquidation, confirmation will be denied.

In this case, a garden nursery planned to restructure its debt to avert bankruptcy proceedings. Its debt consisted of ordinary claims and secured bank financing. The debtor designed a restructuring plan that included ordinary claims incurred up to a specific cut-off date, as well as the bank's secured claims. Ordinary claims incurred after the cut-off date would be paid in full, out of new unsecured financing provided by the bank (authorised by the court in another WHOA decision). The new financing would be repaid in full over the course of 2021 from that year's harvest proceeds. This way, the restructuring plan treated ordinary claims unequally in two ways: (i) by including only the ordinary claims incurred before the cut-off date, and (ii) not including the new unsecured bank financing.

As provided by the WHOA, the debtor asked the court to take an advance decision on whether the unequal treatment would stand in the way of the court confirming the restructuring plan in due course. The debtor justified the unequal treatment by arguing that the costs incurred after the cut-off date would have to be fully paid in order for the debtor to continue its business during the restructuring, and that the new financing was the only way to enable such payment. Otherwise, the business would not be viable from the outset. The Rotterdam District Court agreed, and held that the interests of those creditors that held claims incurred before the cut-off date would not be harmed by the proposed unequal treatment. Quoting the debtor's statement that the unequal treatment was the only way the debtor's business could continue, the court found that without such continuation, the restructuring would be useless and bankruptcy proceedings would follow shortly. According to the court, a draft valuation report showed that the ordinary creditors would not receive any payment out of the bankruptcy. Therefore, the interests of the creditors with a claim incurred before the cut-off date were not harmed by their unequal treatment in the draft restructuring plan, so there was no reason to deny confirmation of the plan.

Lesson learned: The interpretation by the district court provides room for debtors to apply a cut-off date and to, consequently, distinguish between creditors with equal rights. The cut-off date and resulting unequal treatment of creditors has to be substantiated: it has to be a requirement for the restructuring, and the interests of the impaired creditors may not be harmed. If these conditions are met, however, claims following from the normal conduct of the debtor's business may be treated differently, and DIP financing can also be favoured.

Court ruling that right of pledge is not affected by cooling-off period is most likely a glitch

The WHOA allows a debtor or court-appointed plan expert to ask the court to declare a cooling-off period (moratorium). The main effect of this cooling-off period is that no party may recover its claim against the debtor's assets without court authorisation. Unless expressly provided for by the court, this effect applies to all creditors and all types of claims. The same principle applies to a cooling-off period during bankruptcy or suspension of payment proceedings. However, in a case before the Gelderland District Court, the court appears to have deviated from this rule.

In this case, a debtor requested a cooling-off period. One of the debtor's creditors had levied attachments on the debtor and was also holding a pledge over receivables. The debtor wanted the cooling-off period to prevent the creditor from taking further enforcement actions once the latter learned of the restructuring. The court allowed the cooling-off period, but expressly considered that this did not affect the pledgee's right to enforce its pledge. According to the court, this was due to the pledgee being entitled to the proceeds of the pledged claim if the debtor went bankrupt.

It appears that the court anticipated the absolute priority rule (APR) and the best-interest-of-creditors test, which have to be met by a restructuring plan in order for it to be eligible for court confirmation. According to the APR, a restructuring plan may not deviate from statutory and contractual ranking. The best-interest-of-creditors test implies that a restructuring plan may not put a creditor in a worse position than it would be in if the debtor went bankrupt. As the pledgee's ranking entitles it to the proceeds of the pledged claim and this entitlement would hold in a bankruptcy scenario, a restructuring plan would need to honour this right of the pledgee.

This court decision shows some leniency to the pledgee's position. The court held that the cooling-off period in itself did not limit the pledgee's enforcement right. This seems to contradict the statutory provision that a pledgee may not enforce its claim during a cooling-off period provided that alternative security is given, as well as the provision allowing the court to limit the effect of a cooling-off period to certain creditors or, the other way around, to authorise a specific creditor to enforce its rights despite the cooling-off period. Finally, it also appears to go against the interpretation of the cooling-off period as expressed in the legislature's explanatory notes to the WHOA. The court seems to be aware of this, as it does not just allow the cooling-off period but also explicitly authorises the pledgee to collect money on the pledged claim, which would not have been necessary if the court's reasoning – that the cooling-off period in itself does not limit the pledgee's enforcement rights – were true.

Lesson learned: pledgees could invoke this court order as a precedent to argue that their rights under the pledge should be exempted from the effect of the cooling-off period.