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 basic premises of the CERP Act is that the court should only become involved if and when this is necessary to protect the creditors’ interests. As such, the assumption is that the court will only play an active part in the confirmation phase. However, it is nevertheless possible for the court to become involved at an earlier point in the CERP Act process, for example if:
- the court is asked to appoint a restructuring expert (section 371(1) of the Dutch Bankruptcy and Insolvency Act (“Insolvency Act”, in Dutch: Faillissementswet);
- the court is asked to impose or extend a cooling-off period (section 376(1) and (5) Insolvency Act);
- the court, whether acting on its own motion or based on the customised relief mechanism, imposes relief to protect the interests of creditors or shareholders (section 379 Insolvency Act);
- disputes or disagreements exist about the vote on the composition, and a court ruling is sought to provide certainty. This involves the dispute resolution mechanism under section 378 Insolvency Act, which is discussed here.
Purpose of the dispute resolution mechanism
Under the dispute resolution mechanism described in section 378 Insolvency Act, it is possible to petition the court, before the vote on the composition, to rule on disputes and disagreements that arise, or are foreseen, during the preliminary phase. This may serve, for example, to eliminate at an early stage any uncertainty about whether grounds exist for refusing to confirm the composition. For example, in these dispute resolution proceedings, the court might rule that no grounds exist for refusing the confirm the composition or – if it had previously found that such grounds did exist – review whether the proposed composition has been modified sufficiently to eliminate the earlier grounds. Stakeholders are also encouraged to take action promptly (by activating the dispute resolution mechanism): failing to object on time will in some cases make it impossible to subsequently invoke the ground for refusal (section 383(9) Insolvency Act). As such, the dispute resolution mechanism provides additional “deal certainty” (as described in the Explanatory Memorandum) that the composition will be confirmed.
Which parties may refer a dispute for settlement
Under section 378(1) Insolvency Act, a dispute may be referred to the court exclusively by the debtor or (if one has been appointed) the restructuring expert: creditors and shareholders cannot request dispute resolution. The purpose of this arrangement is to prevent the restructuring process from being delayed or blocked as multiple stakeholders repeatedly refer disputes for settlement with a view to improving their own bargaining position.
However, this does not of course diminish the possibility for the debtor or the restructuring expert, acting according to their own judgment, to refer disputes or disagreements that are put forward by creditors or shareholders to the court to obtain certainty and if necessary modify the composition accordingly.
Types of disputes that may be referred for settlement
Section 378(1) Insolvency Act provides a non-exhaustive overview of issues that may be referred to the court for settlement. Essentially, this includes issues relating to the question of whether the composition that has been or will be presented is capable of being confirmed, or whether one or more grounds exist for refusing that confirmation, as described in section 384(2) to (4) Insolvency Act: disputes and disagreements on matters such as the substance of the information presented in the composition, how the creditors are classified, who may vote, the voting procedure and the question of whether (if the various classes of creditors agree to the composition) any of the grounds listed in section 384(2) to (4) Insolvency Act will prevent the composition from being confirmed in court.
If the court receives a request under the dispute resolution mechanism, it has the option, if it judges this to be advisable, of instructing an independent expert to investigate that request and report on his or her findings; that report will be available to voting creditors and shareholders for their examination (section 378(5) Insolvency Act).
The scope of the court’s rulings
If the court receives a request under the dispute resolution mechanism to rule on an issue that has been referred, before making its ruling it will give the debtor, the restructuring expert and the observer (if they have been appointed) and any creditor and/or shareholders whose interests are directly affected by the ruling an opportunity to present their views. The ruling is binding only for creditors and shareholders that were given the opportunity to present their views (section 378(7) and (8) Insolvency Act).
If a creditor or shareholder is not permitted to vote on the composition, and this is not referred to the court under the dispute resolution mechanism, and/or the creditor or shareholder whose interests are affected was not given the opportunity to express their views, that creditor or shareholder may still object to confirmation of the composition, by arguing that he or she is entitled to vote and was wrongly not permitted to. The court will need to review such arguments when hearing the petition for confirmation of the compromise, and will then have to rule on the matter (section 384(2)(b) Insolvency Act). As a consequence, the petition for confirmation could be turned down at the last minute based on grounds for refusing to confirm the composition. The debtor can avoid this risk by resolving these discussions beforehand with the other stakeholders, or referring them to the court under the dispute resolution mechanism.
With the dispute resolution mechanism, it becomes possible to clear up disputes and disagreements while the CERP Act procedure is still underway, providing added deal certainty that the composition will be confirmed. Although the court will handle requests that it receives together wherever possible, this will potentially delay the process. It is the responsibility of the debtor or (if one has been appointed) the restructuring expert to decide whether or not the disputes and disagreements that creditors and shareholders have put forward should be referred to the court for settlement. Frequently, disputes and disagreements can be avoided or resolved by discussing them beforehand, and through scrupulous, professional and transparent preparations for the composition – which in themselves will already give added deal certainty for confirmation. Lastly, stakeholders need to act on time, and so it is vital for everyone to stay on top of the situation. Failing to object promptly could lose a stakeholder the possibility to ask the court to refuse to confirm the composition.