A very important change in insolvency law is imminent. This change concerns the possibility of a debtor’s offering a composition to creditors. In the current situation, there is only an arrangement for the compulsory imposition by the court of an arrangement with creditors in suspension of payments or bankruptcy. In the Bill on the Homologation of Private Agreements (WHOA), the possibility has been included that a compulsory composition without a moratorium or bankruptcy can be concluded. This will drastically change the possibilities for resolving problematic debts. This change is important for debtors, but also for their providers of capital, such as creditors and shareholders.
Changes to insolvency law in the area of composition with creditors
In Dutch insolvency law, the main focus is still on bankruptcy. Most suspensions of payment end in bankruptcy. Bankruptcy is aimed at liquidating the debtor’s assets. In only a few cases is an arrangement offered and approved (homologated) by the court.
Scientists and the government have been thinking for some time about ways of enabling debtors to restructure problematic debts so that there can be continuity instead of liquidation. In this respect, inspiration has been drawn from foreign regulations, such as the chapter 11 procedure of the United States Bankruptcy Code. In 2014, there was the preliminary draft of the Continuity of Enterprises Act II in the Netherlands, which also provided for a compulsory arrangement other than suspension of payments and bankruptcy. In July of this year, the European Directive ‘Preventive Restructuring Schemes’ came into force. This Directive obliges member states to introduce pre-insolvency proceedings within two years. As a result of the Directive, amendments have been made to the Dutch bill. The bill was submitted to the House of Representatives on 5 July 2019.
Homologation agreement outside suspension of payments and bankruptcy
The WHOA provides that a debtor may offer a settlement if he ‘is in a condition where it is reasonably likely that he will not be able to continue to pay his debts’. In this situation, any creditor and shareholder, as well as the debtor himself, can apply to the court for the appointment of a restructuring expert, who can then offer a settlement. As long as the expert is appointed, the debtor himself cannot offer a settlement.
The proposed arrangement will entail a change in the rights of the parties concerned (creditors and shareholders). For example, a creditor will have to accept only partial payment of his claim. The parties concerned are divided into classes and are entitled to vote on the arrangement. It would be going too far to go into the details of this now, but it is important to note that under circumstances a minority in a class that votes against can still be imposed on the arrangement for the reason that the majority has agreed to it. It is also possible under certain circumstances that a class that votes against can still be imposed the agreement by the court. This is called cram down.
Introduction of legislative changes to debt restructuring
As already mentioned, the WHOA is under discussion in the House of Representatives. Whether the law will be introduced in the form of the current proposal cannot be predicted, but due to the fact that the European Directive must be implemented by July 2021 at the latest, it is clear that drastic changes to insolvency law are imminent.
If you have any questions about restructuring and creditor agreements, please contact one of our insolvency lawyers.
