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.
Achieving a composition under the CERP Act will take time, against the background of the debtor operating in a situation where “it is reasonable to assume that it will be unable to continue to pay its debts” (section 370(1) of the Dutch Bankruptcy and Insolvency Act (“Insolvency Act”, in Dutch: Faillissementswet). When this occurs, the debtor’s financial backers, vendors and other contracting parties will determine where they stand and whether they should take action to recover their claims or file for the debtor’s insolvency. Such measures can frustrate the restructuring efforts, will diminish the debtor’s value as a going concern and will cause jobs to be lost. This will rule out any possibility that the composition might have a successful outcome even before the process is properly underway. A cooling-off period makes it possible for the debtor or (if one has been appointed) the restructuring expert to bring about a composition without being blocked by any action taken by individual creditors. While a cooling-off period is in place, the creditors’ possibilities to seek recourse from the debtor’s goods are suspended, and the debtor may (subject to a number of conditions) continue to use, consume and/or alienate its assets in order to remain operational.
When a cooling-off period might be imposed
The court may impose a cooling-off period at the request of the debtor or the restructuring expert if:
- a restructuring expert (in Dutch: ‘herstructureringsdeskundige’) has been appointed, or the debtor has filed the declaration under section 370(3) Insolvency Act with the court registry to announce that the debtor has started the process of offering a composition, and has offered that composition or undertakes to offer it within no more than 2 months (section 376(1) Insolvency Act);
- it is plausible that imposing the cooling-off period is necessary for the debtor to continue operating during the process and it may be assumed, within reason, that the interests of the individual creditors affected by the cooling-off period will not be materially harmed as a result (section 376(4) Insolvency Act).
The cooling-off period may apply to all the creditors (general cooling-off period) or to specific creditors (limited cooling-off period), even if those creditors are not necessarily all included in the composition. Under section 376(2) Insolvency Act, the maximum duration of the cooling-off period is 4 months. If so requested, the court may extend this by up to 4 more months. That request must make a plausible case that material progress has been made in achieving the composition; this will be accepted, at a minimum, if a petition has been filed to confirm the composition (section 376(5) Insolvency Act).
The cooling-off period cannot be extended if confirmation of the composition has been requested in open proceedings and the debtor’s centre of main interest (or “COMI”) was relocated from another Member State during the 3 months before the court first ruled on any matter under the CERP Act.
Consequences of a cooling-off period
A cooling-off period is necessary if it will prevent the added value that will be realised through a composition from evaporating as a result of potential or undertaken actions by individual creditors to recover their claims. A cooling-off period has significant consequences for the creditors that it affects. Under section 376(2) and (7) Insolvency Act, the following happens when a cooling-off period is imposed:
- creditors can only exercise their right to recover their claims on goods making up the debtor’s assets or to demand goods that are under the debtor’s control if the court authorises this, assuming that the creditors have been informed that a cooling-off period has been imposed or are aware of the fact that a composition is being prepared;
- the court may lift attachments if the debtor or the restructuring expert so requests;
- proceedings in which a suspension of payments or insolvency is sought (whether by the debtor or by a creditor in respect of the debtor) are suspended;
- holders of a pledge to a registered claim within the meaning of section 239(1), Book 3 Dutch Civil Code, or to usufruct of such a claim, are not permitted to announce the pledge or to take receipt of payments, nor set payments off against a claim on the debtor, provided that the debtor “provides sufficient alternative security” (section 376(7) Insolvency Act). This will be the case if new claims are pledged that result from the continued operations;
- the debtor retains the right to “use, consume or alienate goods, or to collect payment on claims” if the debtor already possessed that right before the cooling-off period was imposed, if that right aligns with continuing the operations as normal (section 377(1) Insolvency Act) and if the interests of the third parties affected are sufficiently safeguarded (section 377(2) Insolvency Act) by means of alternative security;
- a breach in the fulfilment of the debtor’s obligations that occurred before the cooling-off period “does not constitute grounds to amend contracts or obligations in respect of the debtor, to suspend performance of a contract in respect of the debtor or to rescind an agreement formed with the debtor”, as long as the debtor provides security for fulfilment of any new obligations that arise during the cooling-off period (section 373(4) Insolvency Act). As such, this constitutes an obligation to continue deliveries of goods and services, on the condition that the debtor provides security for payment of the new obligations or else actually pays them.
Safeguards for creditors
Imposing a cooling-off period can have major consequences for the position of creditors, including financiers with a right of pledge or mortgage, creditors with a retention-of-ownership clause in their contracts, creditors with a right of recovery, sellers under a hire-purchase arrangement, creditors that have given assets on loan, and the tax authorities. To prevent debtors from abusing the possibility to request a cooling-off period, the rules include a number of safeguards for creditors.
The court must be able to rule swiftly on the cooling-off period, generally on the same day that it is requested, to ensure (in the creditors’ collective interests) that individual creditors do not block the debtor’s restructuring efforts as they seek to recover their claims. Accordingly, the court will make a ruling without first hearing the debtor, the observer (if one has been appointed), the creditors or other stakeholders.
So does this mean that the creditors’ interests must take a back seat to achieving a composition? No, not entirely. The CERP Act also provides guarantees for creditors:
- under section 376(2)(a) Insolvency Act, the court may authorise creditors to recover their claims from the debtor’s goods;
- creditors that believe that no grounds exist for imposing a cooling-off period, or that a cooling-off period will materially harm their interests, may petition the court to lift the cooling-off period (section 376(10) Insolvency Act);
- under section 376(9) Insolvency Act, when or after imposing a cooling-off period the court may grant relief, either on its own motion or at the request of the debtor, the restructuring expert or a creditor affected by the cooling-off period, to protect the interests of creditors and shareholders, for example by ruling that the vote on the composition must take place before a particular deadline or that information about the composition must be shared periodically;
- under section 376(9) Insolvency Act, when imposing a general cooling-off period the court may appoint an observer within the meaning of section 380 Insolvency Act;
- the court will hear creditors before ruling on a request to extend the cooling-off period (section 376(5) Insolvency Act), when imposing relief within the meaning of section 376(9) Insolvency Act or when lifting the cooling-off period (section 376(10) Insolvency Act);
- to balance the debtor’s right to continue to use, consume and alienate goods (section 377(1) Insolvency Act), the obligation under section 343(4) Insolvency Act to continue deliveries of goods and services and the loss of pledgeholders’ rights to announce undisclosed pledges or to take receipt of or set off payments (section 376(7) Insolvency Act), the debtor is obliged to provide creditors with alternative security to ensure that their claims do not increase further during the cooling-off period.
The purpose of a cooling-off period is to give a debtor facing financial difficulties or (if one has been appointed) the restructuring expert the opportunity to give shape to the restructuring efforts, and offer a composition, in the interests of the capital providers and collective creditors. When a debtor is in that situation, it is vital to be able to continue operating with as little interruption as possible. A cooling-off period facilitates this, by suspending the rights of creditors. It seems that this feature of the CERP Act will offer the debtor’s capital providers and collective creditors sufficient guarantees to prevent unnecessary/abusive use of the cooling-off period mechanism.