CERP Act: court-confirmed compositions
The legislative proposal for the Dutch Act on Confirmation of Extrajudicial Restructuring Plans ("CERP Act", in Dutch: Wet Homologatie Onderhands Akkoord, or WHOA) sets out a procedure to bring about compositions between companies and their creditors and shareholders which can be confirmated by a court.
Intended to create a process of debt restructuring outside of bankruptcy, the CERP Act introduces the possibility to enforce compositions through court confirmation (in Dutch: homologatie) as a last resort if the creditors and shareholders do not all accept the composition.
Background to the CERP Act
The CERP Act is an important pillar in the Dutch government’s legislative programme for the Recalibration of Dutch Insolvency Law (Herijking Faillissementsrecht). The Dutch governments aligns with the European efforts to improve improving companies’ abilities to reorganise outside of bankruptcy, as set out in the EU Directive on preventive restructuring frameworks ((EU) 2019/1023).
Aimed principally at companies with excessive debt that are at risk of insolvency but are essentially still viable, the CERP Act makes it possible for those companies to restructure their debts by offering a framework for composition. In addition, if the composition is confirmed in court, within the parameters of the legislative proposal, it becomes binding on all creditors and shareholders involved, even if some creditors and/or shareholders have voted against the composition. This will eliminate situations where a composition is blocked by the unwillingness of a few holdout creditors or shareholders. It therefore improves the ability of , companies to reorganise and increases the likelihood that an enforceable composition is obtained. The CERP Act also makes it possible for companies to unilaterally amend or terminate existing continuing performance contracts before the contractual end date, as part of the composition. This does not extend to employment contracts, however, which expressly fall outside the scope of the CERP Act.
The CERP Act can also be used for compositions aimed at (voluntary) winding up a company that is no longer viable, if a controlled winding-up of the operations through a composition outside insolvency proceedings offers a better outcome than in insolvency.
The CERP Act draws heavily on legislation in the UK ("Scheme of Arrangements") and the US ("Chapter 11 proceedings"). Wherever possible, the rules under the CERP Act are designed as parameters, giving the parties involved a wide range of possibilities to negotiate the actual terms of a composition. In principle, the court will have limited involvement until a petition is made to confirm the composition.
Composition proceedings under the CERP Act
If properly prepared, composition proceedings under the CERP Act could be completed within two to three months. This achieves the goal of creating a swift efficient and effective composition procedure, in contrast to the current extrajudicial debt restructuring, which requires unanimous consent and can therefore be blocked by a single creditor’s.
While a composition can be offered by a debtor, it is also possible for creditors, shareholders and/or the debtor’s works council or employee representatives to start such process. In that case, it is initiated by a petition to the court to appoint a restructuring expert who will prepare and is intended to offer a composition. If the court agrees and appoints a restructuring expert, the debtor will be required to disclose whatever information that expert requires for the preparation of a composition. Unlike insolvency or a provisional or final suspension of payments, the debtor remains “in possession”, i.e.it retains the power to dispose of the company’s assets.
A composition may apply to one or more categories of creditors and shareholders. Such categories are called classes and they are created based on creditors and shareholders with similar rights of order and priority. Creditors and shareholders with different orders of priority are assigned to separate classes.A composition is offered to each class, and each class votes separately on that composition.
The creditors and shareholders in each class must be given at least 8 days’ time to consider that class’s composition before voting on it. Voting may take place by ballots, in person or using digital means. The outcome of the vote must be included in a report that is prepared and shared with the creditors and shareholders within 7 days after the vote. That report also discloses whether it is the intention to petition for confirmation or not. Lastly, the report must be filed with the court registry, where it will be made available for information purposes. Of a petition seeking confirmation of the composition has been submitted and the report filed, the hearing will be held within 8 to 14 days of filing. If and when the court confirms the composition, it becomes binding on all relevant parties without any option for appeal or cassation.
Requirements for court confirmation
The CERP Act sets out various requirements that compositions must satisfy in order for it to be eligible for court confirmation. The principal requirements are as follows:
- the debtor’s operations must essentially be viable;
- the composition must be necessary and sufficient for the debtor to avoid foreseeable insolvency (“pre-insolvency situation”);
- the composition may not place the creditors and shareholders in a position that is a materially worse than in the case of the debtor’s insolvency (the “best interest of creditors test”);
- the “reorganisation value” that the composition helps to preserve must in principle be shared among the creditors according to their legal order of priority (the “absolute priority rule”);
- all creditors are entitled to a cash exit, with the exception of financial creditors providing loan facilities with security interests;
- each separate class of creditors may only accept its composition if it is approved by a group of creditors that together represent at least two thirds of the total debt owed to the creditors who voted within that particular class;
- SMEs must be offered at least 20% of their claims, unless a compelling reason exists not to.
The CERP Act also sets out a long list of formal requirements that compositions must satisfy, including on how to substantiate the composition and what information to share with the creditors and shareholders.
Expediting relief and provisions
In principle, the court’s involvement is limited to considering the petition for confirmation of the composition. However, the CERP Act also offers several ways to enhance the chances of success of a composition (“deal certainty”), by making it possible to petition the court earlier on in the process and requesting the court for (bespoke) relief. This is provided that , the debtor has filed a declaration with the court registry announcing that a composition is being prepared.
Forms of expediting relief include:
- Dispute resolution mechanism: the possibility to petition the court, before the creditors vote on the composition, to express a binding opinion on elements that are causing disagreement but are important for achieving the composition;
- Customised or bespoke relief mechanism: the court may impose various forms of relief, either on request or on its own motion, to protect the interests of the creditors or shareholders, for example by appointing an observer;
- Observer: the court can appoint an observer, either on request or on its own motion, to oversee the process of achieving the composition in order to monitor the interests of all the creditors;
- Cooling-off period: the court may impose a cooling-off period of up to twice 4 months, if this is necessary for operations to continue during the negotiations about the composition, if it is reasonably plausible that this is in the best interests of all creditors and if this does not materially harm the parties’ respective interests.
The CERP Act also contains various expediting provisions for added efficiency and effectiveness, for example:
- deferral of a petition for insolvency or a provisional or final suspension of payments during a cooling-off period;
- the possibility to opt for open or closed composition proceedings, which will have bearing on a number of issues including the court’s jurisdiction and international recognition of a confirmation judgment.
The CERP Act introduces a much-needed procedure to improve the likelihood of extrajudicial debt rescheduling and restructuring for pre-insolvency operations that are still essentially viable. Entering into force on 1ste of January 2021, the CERP Act is likely to benefit both debtors and their creditors and shareholders, by creating added possibilities to efficiently and effectively restructure debts and avoid insolvency. This is of course particularly welcome for companies in financial difficulties as a result of the unprecedented COVID-19 crisis.