The Dutch Act on Confirmation of Extrajudicial Restructuring Plans (“CERP Act”, in Dutch: Wet homologatie onderhands akkoord, or WHOA) sets out a procedure for companies to restructure their excessive debt by reaching a composition with their creditors and shareholders. Where previously a composition required the approval of all the creditors, and a single creditor could block the restructuring efforts, this changes with the CERP Act.
One of the principal premises for these compositions that equal creditors must be treated in the same manner, and have equal rights. One significant possible consequence of a composition is that a majority of the creditors vote in a way that forces the minority of the creditors in an equal position to accept the substance of the composition. To this end, creditors are assigned into separate “classes”. Every draft composition must describe the various classes, and explain the criteria for assigning creditors and shareholders to each class (section 375(1)(c) of the Dutch Bankruptcy and Insolvency Act (“Insolvency Act”, in Dutch: Faillissementswet). If the classification is not done properly, this constitutes grounds for the court to refuse the petition to confirm the composition (section 384(2)(c) Insolvency Act). As such, the premise described above hinges on establishing which creditors are “equal” and must therefore be treated equally.
How to classify creditors
The Insolvency Act does not dictate an exhaustive order of priority for all creditors. Instead, it presents three criteria, all of which are phrased in negative terms.
First, creditors and shareholders do not belong to the same class if the rights and claims that they would have in insolvency proceedings or that are offered to them under the composition are “sufficiently different that their positions cannot be compared” (first sentence of section 374 Insolvency Act). It is important to note here that the legislature focuses on the parties’ rights, not their capacities. This means that classification is determined by the creditors’ rights; however, the Explanatory Memorandum reveals that other factors may also come into play when the composition is reviewed in court.
Second, the legislature has introduced a mandatory rule stating that “at a minimum” creditors or shareholders with different orders of priority (whether based on the Dutch Civil Code, another statute, any derived regulation or a contractual arrangement) cannot be classified together (second sentence of section 374 Insolvency Act).
Lastly, any debt to a secured creditor that is not covered by the security interest, will be classified separately as unsecured.
These three criteria present the debtor and the restructuring expert with potentially complicated questions: Should a secured creditor be treated the same for the part of the debt that is unsecured as an “ordinary” (i.e. unsecured) creditor? If creditors reach an intercreditor agreement or agree on a schedule for recovery, does this change the classifications?
It is also important to note that the party offering the composition will not remain in uncertainty until the confirmation about whether the classes have been assigned properly. An explicit possibility is described to petition the court to rule on standards or guidance before ruling on the confirmation (section 378(1)(b) Insolvency Act): the law offers the debtor or the restructuring expert the possibility of having the proposed classification (or at least part of it) reviewed by the court if that is felt to be necessary. The court’s ruling on the classification is binding for all parties that the court has given the opportunity to present their views (section 378(8) Insolvency Act).
Proper classification will be a central issue whenever the CERP Act comes into play. The three criteria, phrased in negative terms, will need to be given shape principally through practical application. Equal creditors should be positioned equally if the composition not only is to be practicable, but must be capable of being confirmed. The classification may be referred to the court beforehand for review, to identify any disagreement on this matter and make a binding ruling. As such, an important rule of thumb is to be scrupulous in identifying and classifying the creditors.