The position of the SME entrepreneur as a creditor in a WHOA arrangement
On 1 January 2021, the Homologation Underhand Arrangement Act (WHOA) entered into force. This law introduced a new restructuring instrument. Its purpose is to prevent companies from being declared bankrupt while they are still (partially) viable. The statutory scheme includes a minimum protection for (smaller) SMEs. This is also referred to as the 20% rule. In this article I will explain the position of the SME as a creditor in a WHOA settlement.
Classification of creditors in the event of a WHOA agreement
Creditors and shareholders must be divided into different classes when a WHOA agreement is offered, if their rights in a liquidation of the assets in bankruptcy or offered on the basis of the agreement are so different that there is no comparable position. In any case, creditors who have a different rank in recovering the debtor’s assets will be assigned to different classes. A difference in rights exists, for example, between preferential creditors (creditors with rights of priority) and unsecured creditors (creditors without rights of priority).
Minimum payment to small SME creditors under WHOA agreement
Small SME creditors must, in principle, be paid at least 20% of their claim under the WHOA agreement if they:
- have an unsecured claim for goods or services supplied;
- or have an unsecured claim from an unlawful act (Art. 374 paragraph 2 Bankruptcy Act).
This may be deviated from if there are compelling reasons to offer less than 20%.
What is a small SME creditor under the WHOA?
These small SME creditors are defined as creditors where fifty or fewer persons are employed or who meet the criteria of Art. 2:395a of the Civil Code or Art. 2:396 of the Civil Code. These articles of law determine which companies qualify as micro or small businesses. This is the case when, on two consecutive balance sheet dates, at least two of the three requirements below are met:
- the annual net turnover is less than € 12 million;
- the balance sheet value is less than € 6 million;
- the average number of employees during the financial year is less than 50.
Classification of SME creditor in separate class in WHOA agreement
If the requirement to offer at least 20% satisfaction of the claim to the small SME creditors is not met, these creditors should be classified in a separate class.
If this class does not agree to the arrangement, a creditor from that class can ask the court to reject the homologation of the arrangement. The court will then have to do so, unless a compelling reason has been shown for offering less than 20% satisfaction of the claim.
WHOA agreement must meet information requirements
Article 384, paragraph 2 sub c Bankruptcy Act stipulates that a request for approval of the composition will be rejected if the composition itself and the documents submitted with it do not contain all the information referred to in Article 375 Bankruptcy Act. This section of the law enumerates the information that a settlement agreement must contain. One of these information obligations concerns a statement showing on what serious grounds the class of small and medium-sized creditors is offered less than 20% of their claim.
Both to comply with this information requirement and to convince the creditors in question and the court that there are weighty grounds for offering less than 20%, it is important to pay sufficient attention to the statement.
Judgment regarding rejection of WHOA request
In a judgment of 10 November 2021 by the District Court of Midden-Nederland, a request for homologation of a WHOA agreement was rejected for various reasons. One of these reasons was that the small SME creditors had been offered less than 20% of the claim and that the creditors in question had not been placed in a separate class. According to the court, there was therefore a violation of section 374 of the Bankruptcy Act. In another article on our website you can read more about this judgment and find more information about the WHOA.
More information about the WHOA
You can read the following articles on our website about the WHOA:
- the WHOA in outline (discussion of bill);
- the role of the restructuring expert under the WHOA; and
- rejection of homologation request WHOA agreement
Looking for a lawyer about the 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.
