Rejection of homologation request WHOA agreement
The Homologation Underhand Arrangement Act (WHOA) went into effect on January 1, 2021. In the meantime, a substantial number of rulings have been issued on it. It remains to be seen how practice will develop and whether it can be said whether the introduction of the Act has been a success. To date, the number of (published) granted homologation requests is still relatively small.
Below I will discuss a decision of 10 November 2021 of the District Court of Midden-Nederland, which rejected the request for homologation of a WHOA agreement on several grounds.
What is the WHOA?
The WHOA offers the possibility for a debtor to have a creditors’ agreement compulsorily imposed by the court. The mandatory imposition of the agreement is called homologation. Such an agreement may include, for example, that the creditors have to settle for a smaller payment than they were entitled to. Before the introduction of the WHOA this was only possible in the case of suspension of payments and bankruptcy. The WHOA is intended to settle debts at an earlier stage, so that a moratorium or bankruptcy can be avoided.
You can read more on our website about what the WHOA broadly entails and the role of the restructuring expert under the WHOA.
Case: request for mandatory imposition of WHOA agreement
Five private companies belonging to the same group have asked the court to approve agreements. There is one creditor, anonymously referred to in the judgment as ‘company 1’, who has a substantial claim of €9.5 million against the five debtors, whereby there is joint and several liability. The joint and several liability entails that company 1 has the right to sue each of the five debtors for the entire debt.
Classification in WHOA agreement
In the applications of all five applicants, the creditors are divided into two classes, namely the preferential creditors (creditors with rights of priority) and unsecured creditors. The Tax Authority is the only creditor in the class of preferential creditors. The other creditors, including Company 1, are divided into the unsecured creditor class. Company 1 was included in this for the claim of €9.5 million in all five applications and represents by far the largest portion of the indebtedness in the classes of unsecured creditors. In the event of a vote in the classes, Company 1 therefore has a casting vote.
The settlement offered would pay ,021% of the claims of the unsecured creditors and 6,93% of the claim of the Tax Authorities. Due to the fact that company 1 is a creditor of all five applicants (because of the joint and several liability), it would in fact receive 5.1% of its claim based on the settlement.
Special conditions for discharge
Further, the case shows that Company 1 financed the group companies. In addition, Company 1 has imposed special conditions on the granting of discharge (i.e., cooperation with the arrangement). Company 1 will only grant discharge if the Arrangement is reached and if it will provide the new financing. Details of the provision of the financing were not disclosed. Furthermore, the agreement is conditional on final discharge being granted to Company 1 and the management.
Creditors’ objections to homologation of WHOA agreement
There are four creditors who object to the offered agreements. The following aspects are particularly important in this regard:
- The lack of information about, in particular, the position of Company 1;
- the chosen class division and, in that regard, in particular the influence that Company 1 will have as a result on the outcome of the vote; and
- The position of Company 1 and the board after the implementation of the agreement.
The importance of proper class scheduling in a WHOA agreement
Article 384 paragraph 1 Bankruptcy Act stipulates that a request for homologation of a settlement agreement can be granted, unless one or more of the grounds for rejection, referred to in Article 384 paragraph 2 to paragraph 5 Bankruptcy Act, occur.
The court indicates that this test lies primarily with the creditors themselves. Further, the court considers:
“With a proper class division, the voting result in principle gives democratic legitimacy to the agreement. When the creditors are divided into a limited number of classes, as in this case, and thus little distinction is made between the rights of creditors, there is a risk that the vote of one or a few large creditors will determine the outcome of the vote. The importance of protecting the dissenting minority is then greater. ”
As far as I’m concerned, it’s good that the court is aware of this.
WHOA agreement must meet disclosure requirements
Art. 384 paragraph 2 sub c Bankruptcy Act stipulates that a request for homologation of the agreement will be rejected if the agreement itself and the documents submitted with it do not contain all the information mentioned in art. 375 Bankruptcy Act. This section of the law enumerates which information a settlement agreement must contain.
Missing explanation on why shareholders are not covered by WHOA agreement
When offering a settlement agreement, creditors or shareholders not covered by the agreement must be declared. The offered arrangement did not include the shareholders. However, there was no explanation as to why the shareholders were not covered by the arrangement. Therefore, the court considers the provision of information on this point insufficient.
What are liquidation value and reorganization value?
When offering the settlement, the reorganization value and the liquidation value must be quantified, among other things. The reorganisation value is the value that is expected to be realised if the settlement is reached. The liquidation value is the proceeds that are expected to be realized in a liquidation of the debtor’s assets by a bankruptcy trustee in bankruptcy.
Comparison of liquidation value with offer from WHOA agreement
By comparing the liquidation value and what is offered to creditors with the agreement, it can be assessed whether creditors will be better off with the debtor’s bankruptcy or with compliance with the agreement. Article 384 paragraph 3 Bankruptcy Act states:
“At the request of one or more voting creditors or shareholders who have not themselves consented to the agreement or who have been improperly denied the right to vote, the court may reject an application for approval of an agreement, if it is summarily apparent that these creditors or shareholders are worse off on the basis of the agreement than they would be in a liquidation of the debtor’s assets in bankruptcy.”
This is called the Best Interest of Creditors test.
Insufficient information on liquidation value
In the discussed case, the liquidation value was calculated only concerning a limited number of applicants. One of the applicants is known to have inventory and claims on debtors, yet no liquidation value has been calculated. A liquidation value of another applicant has not been calculated either, while a balance sheet does show a claim on a related party of €5.7 million, without it being clear which party that is. It is also unclear what the value is of 100% equity interests held in other companies. At the hearing it was stated by the applicant that the shares are worthless, but the court cannot establish this. The court concludes that the information in the offered agreements is inadequate on this point.
Insufficient information on position funder agreement WHOA
Also, according to the court, the information provided about the position of Company 1 before and after the arrangement is inadequate. Company 1 is a creditor, but also the financier of the arrangement. According to the court, insufficient information has been provided about the financing and the conditions to be attached to it. Therefore the court concludes that too little insight has been given to enable the creditors to form an opinion about the arrangement.
Incorrect classifications under the WHOA
The court recalls that the request for homology should be rejected if the class division does not meet the legal requirements. Creditors must be assigned to different classes if their rights in a liquidation of assets in bankruptcy or those offered to them on the basis of the composition are so different that there is no question of a comparable position.
Creditors’ rights are too different in WHOA agreement
The court held that Company 1 should have been classified in a different class than the other unsecured creditors. Based on the arrangement, due to the joint and several liability of the five applicants, Company 1 would receive five times the distribution of 1.02% on the total claim (i.e. a total of 5.1%), while on the claims of other unsecured creditors, only once 1.02% would be distributed. Therefore, the rights of Company 1 are too different, according to the court.
Classification of SME creditors into separate class in WHOA agreement
According to the court, the SME creditors should also have been assigned to a separate class under the Bankruptcy Act. Furthermore, the court noted that with respect to one creditor, who was classified in the class of unsecured creditors, it applies that the claim is contractually subordinated. On this point, too, the class division is incorrect.
Severity of defects with respect to class assignment
Furthermore, the court ruled that it cannot be assumed that the defects with regard to the class allocation could not have led to a different outcome of the vote concerning four of the five applicants. In the case of four of the five Applicants, the unsecured class of creditors would not have agreed to the Arrangement if Company 1 had been classified in a separate class.
Grounds for rejecting homologation WHOA agreement
As can be seen from the foregoing, the court has found several problems, both with respect to the disclosure of the agreement, and the class certification. The court rejects the requests for homologation of the agreements.
Legal assistance with WHOA agreement
In addition to being able to cast a vote in the class of creditors, a creditor in a WHOA agreement also has the option (under certain circumstances) of requesting the court to reject the homologation of the agreement.
In the case discussed, four creditors raised various objections. The judgment shows that, based on some of these objections, the court has come to the conclusion that the request for homologation should be rejected.
Looking for a lawyer about WHOA agreement in Rotterdam?
If you need legal assistance in offering a settlement under the WHOA or if you wish to object to the settlement as a creditor, please contact Peter de Graaf.
