Restructuring a corporate group that finds itself in financial distress is generally not an easy task. In times of economic prosperity, the finances of group companies often become interlinked and it is common, for example, for the group’s finances to include joint and several liability on the part of the individual companies making up the group for the debts of the group as a whole. Most parent companies will also issue statements under section 403, Book 2 of the Dutch Civil Code in connection with the group’s consolidated financial statements, in which the parent company accepts joint and several liability for debts resulting from legal acts by the companies lower down in the group’s structure. Within corporate groups, the operations are also frequently closely connected, and what one group company does depends on what happens at the other companies. These financial and operational ties mean that the fates of group companies are often intertwined, and financial distress at one company can have a ripple effect on the financial health of the group overall.
This economic reality is not reflected in legislation, however: as a rule, laws often take the individual company as their point of reference. For example, in corporate law, the powers of separate corporate bodies are allocated without taking the existence of group companies into account. The same is true under insolvency law and the rules for suspension of payments, where the proceedings are essentially also designed to apply to single companies. Fortunately, the introduction of the Dutch Act on Confirmation of Extrajudicial Restructuring Plans (“CERP Act” or “Dutch Scheme”; in Dutch: Wet homologatie onderhands akkoord or “WHOA”) changes this. The new legislation recognises corporate groups and the relationships between group companies, at least to a degree.
This contribution provides an overview of how the new legislation makes allowance for group structures and how the Dutch Scheme can help in groups’ attempts to restructure or to clean up their finances.
Distressed groups under the Dutch Scheme
When financial difficulties arise, it is important to take swift action to isolate the problems as much as possible, for example through restructuring at various levels within the group. It was against this backdrop that constructions were developed in the 1980s in which corporate groups, often assisted by banks, would split off healthy and financially robust parts from their weaker sisters to form “hospitals” and “mortuaries”. This would then give the enterprise a new lease of life. Elements of these constructions are still used in practice to restructure corporate groups.
As explained above, if part of a group is declared insolvent or is granted a suspension of payments, the rest of the group’s performances might also suffer. While a group is flourishing, it can be managed as a single enterprise, and the interests of the group overall will determine the interests of the separate group companies; in insolvency, however, the interests of the creditors of the insolvent company (or the company that has been granted a suspension of payments) will come first. As a result, a looming insolvency will create added pressure – operational as well as financial – if the group is managed as a single enterprise, for example as a result of close operational and financial ties. Even within corporate groups, the assets will be liquidated separately, potentially resulting in a loss of value and diminished organisational and economic cohesion. The individual insolvent company is first in the line of fire, and as a rule the insolvency trustee will look only at that company. Another complicating factor is that the insolvencies of multiple group companies might be handled by separate courts. As this shows, corporate groups also have ample motivation for preventing insolvencies among their group companies wherever possible.
The CERP Act creates new prospects for restructuring corporate groups, offering enterprises the possibility to reschedule their debts on time by offering their creditors an extrajudicial composition. The advantage is that the composition can have binding effect on creditors and shareholders even if they voted against it. If debts are waived under the composition, this could save the enterprise from plummeting into a financial abyss (although it might still need to clean up its operations). The new legislation offers a choice between open and closed proceedings. Its purpose is to increase companies’ capabilities for reorganising. Specifically for corporate groups, the Dutch Scheme offers two facilities: the first is the possibility to consolidate proceedings, where separate composition proceedings within a single group will be heard by the same court, and the second is the possibility to restructure group warranties or pre-existing mutual financial ties by bringing multiple group companies under the scope of the composition. If necessary, elements of the “hospital” and “mortuary” constructions described above can be formalised in the composition, or given shape against the backdrop of the composition.
Consolidating proceedings and restructuring mutual financial ties under the Dutch Scheme
The first facility that is available under the Dutch Scheme is the possibility to consolidate proceedings within corporate groups, if multiple group companies offer compositions. Under section 369(8) of the Dutch Bankruptcy and Insolvency Act (Faillissementswet), the legal entities involved may ask one of the courts with territorial jurisdiction to hear all requests that are made to bring about compositions for the entities. This means, therefore, that all requests may be referred to a single court that has territorial jurisdiction, which is not a given for insolvencies and suspensions of payments. In principle, this also covers the possibility of bringing non-Dutch group companies into the proceedings. An important question here is whether the composition proceedings are open or closed, given that the European Recast Insolvency Regulation applies only to open composition proceedings, and establishes jurisdiction according to the “centre of main interest”, or COMI. As a rule, the COMI will be the same place as where the company has its registered office. Closed proceedings are not covered by the Insolvency Regulation, and whether or not the Dutch courts have jurisdiction will depend on the conflict rules in the Dutch Code of Civil Procedure. One of the key issues here will be whether the case is sufficiently closely connected to the Dutch legal regime.
Another possible scenario is that only one of the group companies wishes to offer a composition. The basic assumption is that compositions that come about under the Dutch Scheme apply only to the debtor in question, not the debtor’s sureties and other joint debtors. This means that a composition, once formed, will release only the original debtor from its debts, and creditors can still seek redress against the joint debtors and sureties for payment of the entire claim. Group restructuring through an extrajudicial composition at the level of a subsidiary could then become very difficult if the subsidiary’s creditors can as yet obtain full payment of their claims, for example from the parent company or another group company that has accepted liability for those claims.
With this in mind, section 372 Insolvency Act states that compositions may affect creditors’ rights not only in respect of the company involved in the composition proceedings, but also in respect of the debtor’s group companies that have provided security for payment of the principal debtor’s obligations or have accepted liability for payment of those obligations. A group wishing to invoke this facility must satisfy a number of criteria, however. First, the group must in fact qualify as a group within the meaning of section 24b, Book 2 of the Dutch Civil Code, i.e. the companies must be organisationally connected, form a single economic unit and have a single central management. Next, the group companies in question must also find themselves in a situation where it is reasonable to assume that they will be unable to continue to pay their debts. This is a general requirement for all debtors that wish to invoke the Dutch Scheme. Another requirement is that the court would have jurisdiction if the group company offered a composition of its own. Non-Dutch group companies may be brought into the composition in so far as the Dutch courts have jurisdiction, which is a question that will depend on the nature of the proceedings chosen: open proceedings fall under the conflict rules of the Recast Insolvency Regulation, and one of the factors will be where the group company’s COMI is, while closed proceedings offer additional options, although the case will need to be sufficiently closely related to the Dutch legal regime. According to the Explanatory Memorandum on the CERP Act, this might be the case if the companies established in the Netherlands make up a substantial portion of the group or if the debtor offering the composition holds substantial assets in the Netherlands. Next, unless the composition is offered by a restructuring expert, the group companies involved must agree to the proposed changes; if a restructuring expert has been appointed, the group companies’ consent is not needed. Lastly, the group company may not have already initiated proceedings of its own. Essentially, therefore, invoking this facility allows a debtor to bring in other group companies under the composition; those group companies must therefore also be in financial distress.
If these criteria are not satisfied, the composition may not apply to the other companies, and third parties will be able to seek redress against jointly liable group companies for the balance of their claims that is not covered by the composition. Those group companies could then as yet seek redress against the original debtor – i.e. the company that offered the composition – to recover the portion of the debts that they paid to its creditors. Since this would otherwise render the composition useless and recovery of the claims could as yet create problems for the debtor, the CERP Act states that debtors that pay the balance of a creditor’s claim cannot seek redress against the original debtor. This is another reflection of how the new legislation makes allowance for mutual financial ties within corporate groups (this rule applies not only in this context, but also to claims for redress from outside the group itself).
Possible relief and court confirmation
The Dutch Scheme includes various possibilities for giving debtors financial breathing space while the process is underway. The first is a cooling-off period, when creditors cannot seek redress against the debtor’s assets to recover their claims, and the court might also lift attachments that have been levied. If other group companies have been brought into the composition, the cooling-off period may extend to them as well, as may the customised relief mechanism of section 371(1) Insolvency Act. It is also possible to file a petition within the meaning of section 378(1) Insolvency Act for those companies to ask the court to rule on uncertain aspects that are relevant for forming the composition.
To confirm a composition, the court must assess whether the composition satisfies the requirements of section 384 Insolvency Act for each of the legal entities involved, e.g. whether each entity’s composition contains sufficient guarantees that it will be fulfilled. One concern might be whether including warrantors in the composition will leave creditors worse off than if the composition applied to the original debtor only. In principle, that will not be true: warrantors can only be included if they are also already in financial distress. Moreover, the court must refuse to confirm the composition if a plausible case is made that the creditors or shareholders will be left worse off under the composition than they would if the debtor’s assets were liquidated in insolvency. If the composition applies to additional group companies, the situation will need to be compared with a hypothetical scenario in which each of those companies becomes insolvent, including the company providing the warranties. In practice, I fear that this will not always be simple. However, with the direct debtor unable to repay the full debt and the warrantor also in financial distress, the creditor’s position will already have been an unenviable one even before the composition. Yet the premises underlying the CERP Act and the criteria for involving other group companies in the proceedings mean that it is not automatically possible to use the Dutch Scheme to liquidate a subsidiary’s assets under a composition, for example, and leave the debts with that company if the rest of the group is still in relatively robust financial health. In that scenario, the creditor’s claims on the warrantor or a company with joint and several liability cannot be included in the composition, since the group company does not satisfy the requirement of being in a situation where it is reasonable to assume that it will be unable to continue to pay its debts. Not only that, but the creditors could then also seek redress against those other companies, and so obtain more payment in the event of an insolvency. If the other group companies that have warranted payment of the distressed subsidiary’s debts are still relatively healthy, therefore, it will nevertheless be necessary to make individual arrangements with creditors about the warranties/joint and several liability. What the Dutch Scheme does mean is that, in the event of a composition at the level of the subsidiary only, if the creditor then as yet holds the parent company liable, for example on the basis of a warranty, the parent company cannot enforce any claims for redress against the group company.
The CERP Act makes allowance for corporate groups. If multiple companies belonging to one and the same group offer a composition, it is possible to consolidate the proceedings before a single court. It is also possible to include the debts of multiple group companies in the composition if those debts stem from fulfillment of or security for the original debtor’s obligations. This represents the first time that the Dutch Insolvency Act has provided a procedure that recognises mutual financial ties within corporate groups, and the Dutch Scheme offers an exciting testing ground for further consolidation of insolvency and restructuring proceedings in the future.
 This contribution refers to both “corporate group” and simply “group”; both terms are used to describe the concept of groep within the meaning of section 24b, Book 2 of the Dutch Civil Code.
 See M. Olaerts, Beleidsbepaling in financiële moeilijkheden, Intersentia 2007, pp. 60ff.
 See S.C. Pepels, “De WHOA als instrument voor (grensoverschrijdende) groepsherstructureringen”, Maandblad voor Ondernemingsrecht 2020/1.1, and S.M. Bartman, A.F.M. Dorresteijn, M. Olaerts, Van het Concern, Deventer: Kluwer 2020, Chapter 11.
 S.C. Pepels, “De WHOA als instrument voor (grensoverschrijdende) groepsherstructureringen”, Maandblad voor Ondernemingsrecht 2020/1.1.
 See section 370(2) in conjunction with section 160 Insolvency Act.
 Parliamentary Records II 2018/19, 35249, no. 3 Explanatory Memorandum, p. 32 and, related, S.C. Pepels, “De WHOA als instrument voor (grensoverschrijdende) groepsherstructureringen”, Maandblad voor Ondernemingsrecht 2020/1.1.
 Section 370(2) Insolvency Act.
 Section 376(2) Insolvency Act.
 For example, see N.W.A. Tollenaar, “Het wetsvoorstel Homologatie Onderhands Akkoord onder de loep genomen”, Tijdschrift voor Insolventierecht 2019/32.