New Dutch scheme—an update

New Dutch scheme—an update

We look at the new restructuring scheme in the Netherlands that entered into force on 1 January 2021. The scheme allows for global restructurings as it features elements of the USC chapter 11 (such as a cram down mechanism and moratorium) and the UK Scheme of Arrangement (such as implementing a plan outside of formal insolvency proceedings). Written by Willem van Nielen from Recoup Lawyers (NL) (www.recoup.nl) and Bas van der Wal from the Radboud University.

What kind of proceedings are the Dutch Scheme? Who can initiate the Plan?

The debtor may propose a plan as long as a restructuring expert has not been appointed. A creditor, a shareholder, the works council or the workplace representative may also initiate the restructuring proceedings by requesting the court to appoint a restructuring expert. This ´expert´ is entitled to propose a plan to the exclusion of the debtor. The debtor remains in full control of the ordinary course of business throughout the process. The restructuring expert is only concerned with the preparation of a plan. He requires the consent of the debtor to propose a plan if it concerns a small or medium size enterprise (SME). The ‘SME’ is defined in accordance with the broad criteria of the EU Directive on Preventive Restructuring Frameworks, Second Chance and Measures adopted on 6 June 2019 (amendment of Directive 2012/30/EU (COM)(2016) 72), ie, > 250 employees in the group, 50 million turnover etc). In that case, the shareholders are not allowed to frustrate the consent of the board of directors in an unreasonable way.

 What are the requirements for the court to confirm the plan?

The content of the plan is very flexible and may contain an extension and/or reduction of debt; a debt for equity swap, a sale of assets, a controlled wind-down, etc. The plan can bind all types of capital providers upon approval of the court, including secured and preferential creditors and shareholders. It can also be limited to a subset of the capital providers. However, it cannot affect obligations arising out of employment contracts.

The plan can be put to vote in classes which are formed on the basis of similarity of new and existing rights (similar to the USC Chapter 11). For example, a class can consist of (several) secured creditors. It is worth mentioning however that a secured creditor will only be a part of this class of creditors, insofar as their claim is secured. The part of the claim that isn’t secured, will be part of the class of creditors without security interests. A class is considered to have accepted the plan when two thirds (2/3) in amount of those participating in the vote have agreed. The voting is thus not merely based on a head count.

Court confirmation can be given in two situations:

  •  When all classes have accepted the plan. In that case no dissenting creditor may receive less in value, whether in cash or in non-cash, than it would expect to receive in liquidation if that would be the only alternative left (best interests of creditors test).
  • When one or more classes have rejected the plan (cram down). In that case, at least one in the money class must have accepted the plan. The dissenting members of the dissenting class must have the right to choose between either (i) a distribution in cash in accordance with their rank of the liquidation value, or (ii) a distribution in cash or non-cash in accordance with their rank of the reorganization value (ie the value distributable if the plan is in effect). So, dissenting creditors in a dissenting class may ask the court to refuse confirmation when the plan is considered unreasonable in accordance with the absolute priority rule. The absolute priority rule can be disregarded when there is a reasonable ground and interests of the dissenting members won’t be affected. Secured creditors of commercial financing, however, don’t have the right to force a distribution in cash. These creditors only have the right to choose for a distribution in a form other than money in case they were offered shares or depositary receipts for those shares. These creditors can for instance choose for a postponement of payment for current debts on market terms.

Furthermore, the Dutch scheme has an additional protection for certain creditors. When the concerned trade creditors are considered small or medium sized under Dutch law and they will receive less than 20% of their total claim under the plan, the court can reject the proposal if the debtor cannot provide a compelling ground for this distribution. This addition had been put into effect to make sure that small trade creditors will also benefit from a plan under the Dutch scheme.

In case of SMEs, the consent of the debtor is required before the court can approve the plan upon request of the restructuring expert. In that case, holders of equity may not exercise a hold out position and are not allowed to frustrate the consent of the board of directors on behalf of the debtor in an unreasonable way.

 Which supportive measures can be put in place? What protections ensure that capital providers receive all the relevant information?

During the discussion at the breakfast seminar in London, it was noted that one of the challenges with the UK Scheme of Arrangements is to ensure that the capital providers have sufficient information to come to an informed decision about the plan. In that respect, it was discussed that the Dutch Scheme provides that the plan shall contain all required information to come to an informed decision prior to the vote. According to the Dutch scheme, the required information comprises a long list of matters, including: which criteria for class formation have been used, financial consequences of the plan, the expected reorganization value based on what assumptions and valuation methods, etc.

When a restructuring expert has been appointed, the directors, shareholders, supervisory directors and employees are all obliged to provide the restructuring expert with all relevant information and cooperation. Moreover, the restructuring expert has the authority to safe-guard all necessary data and administration of the company.

Furthermore, upon request of the debtor, restructuring expert or on his own initiative, the court can: (i) provide that the debtor needs to inform the court and creditors on a regular basis about the process and (ii) appoint an observer when there is no restructuring expert with the task to monitor the plan with regard to the interests of the joint creditors. The observer can inform the court that the debtor may not be able to put the plan into effect or that the interests of the creditors may be harmed. In that case, the court may appoint a restructuring expert with the task of developing and proposing a plan and request the court for approval in exclusion of the debtor.

The first two months after coming into effect

Within the first two months after coming into effect, there have been several judgements regarding the Dutch scheme. Most of these rulings had to do with proclaiming a stay/moratorium or with appointing a restructuring expert or an observer. However, there has also already been an approval of a plan. The company in question was an events agency and was understandably severely affected by the pandemic due to canceled events. The new Dutch scheme provided this company with the means necessary to force some creditors to accept the proposition of the company and in doing so, saved this company from bankruptcy. This successful example of restructuring under the Dutch scheme offers perspective for many companies that have been affected by the pandemic and could prove vital in saving the economy when this pandemic is over.

This article is an update by Willem van Nielen and Bas van der Wal of the article that was first published on 1 October 2019 on LexisPSL R&I and that was based on the presentation of Willem and his discussion with a UK (Liz Osborne and Felicity Toube QC) and French (Stephane Bonifassi) panel during INSOL Europe/IWIRC London Network Breakfast Seminar in London on 9 September 2019 concerning cross-border restructuring instruments of the UK, France and the Netherlands.

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About the author:
Kathy specialises in restructuring and cross-border insolvency. She qualified as a solicitor in 1995 and has since worked for Weil Gotshal & Manges and Freshfields. Kathy has worked on some of the largest restructuring cases in the last decade, including Worldcom, Parmalat, Enron and Eurotunnel.