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.
Under the CERP Act, it becomes possible for an extrajudicial composition to be confirmed in court, making it binding for the debtor and all the debtor’s creditors. In the case of an open composition, it will even be recognised in the whole of Europe. After the creditors have voted on the composition, the debtor or restructuring expert may ask the court to confirm the composition.
The essential premise is that the court will approve a request to confirm a composition that has been offered under the CERP Act, except if one or more general or additional grounds exist to refuse confirmation. Those grounds are discussed below.
The court may refuse to confirm a composition on its own motion or at the request of any of the voting creditors or shareholders. A party wishing to invoke a ground for refusal must make this known on time (or preferably have announced it sooner), or else be barred from invoking that ground (section 383(9) of the Dutch Bankruptcy and Insolvency Act (“Insolvency Act”, in Dutch: Faillissementswet).
The general grounds for refusing to confirm a composition, which are laid down in section 384(2) Insolvency Act, are intended to ensure a legitimate ruling on the request for confirmation. The purpose of the additional grounds for refusal (section 384(3) and (4) Insolvency Act is to ensure that the composition is reasonable and that the debtor’s assets are divided fairly. If necessary, the parties can use the dispute resolution mechanism to ask the court to review potential grounds for refusal before the composition is presented for confirmation (section 378(1)(e) and (f) Insolvency Act).
General grounds for refusal
Absence of the required situation (sub-subsection a)
The first general ground on which the court will refuse to confirm a composition is based on one of the essential premises of the CERP Act: the debtor must be in a situation where it is reasonable to assume that it will be unable to continue to pay its debts (section 370(1) Insolvency Act). The debtor must be in serious financial difficulty that puts the continued existence of the company’s operations in jeopardy. If the debtor is not in that situation, the circumstances do not offer a legitimate reason to intervene in the legal relationships through a court-mandated composition. As a consequence, the court must turn down the request.
Shortcomings in the notification of the composition (sub-subsection b)
A second ground for the court to refuse to confirm a composition is if the debtor has failed to fulfil the obligation to notify its creditors and shareholders. Providers of equity and borrowed capital must be notified in the correct manner of an imminent composition, the vote on that composition (section 381(1) Insolvency Act) and the court hearing (section 383(3) Insolvency Act). The court will make an exception to this ground for refusal if the capital providers, despite not having been notified correctly, announce that they will agree to the composition.
Shortcomings in the information contained in the composition (sub-subsection c)
Another reason for the court to refuse to confirm the composition is if the composition and its accompanying documentation do not contain the information that the law dictates to be necessary – in section 375 Insolvency Act –for stakeholders to come to an informed opinion on the composition. Confirmation will also be refused on grounds of incorrect classification of creditors [link to classification blog] or if the court believes that the voting was not conducted properly. The request for confirmation will not necessarily be turned down by reason of a shortcoming – in the information provided, in the classification of creditors or in the voting process – that could not, within reason, have yielded another outcome of the vote.
Shortcomings in the allocation of voting rights (sub-subsection d)
The fourth ground that the law states for the court to withhold confirmation of a composition is if the amount for which a capital provider is represented in the vote is incorrect. The previous exception applies here too: if the amount for which a creditor or shareholder is represented in the vote is incorrect, but the vote could not, within reason, have had a different outcome, this will not stand in the way of confirmation.
Absence of deal certainty (sub-subsection e)
The court may also refuse to confirm a composition if insufficient guarantees for performance are available– if it is not sufficiently certain, therefore, that the debtor will in fact be able to fulfil its obligations under the composition (a principle commonly referred to as “deal certainty”). Although the court must establish whether the debtor can make the promised payments, however, payment does not need to be absolutely certain.
Harmful new financing or deceit (sub-subsections f and g)
Another possibility is that the debtor wishes to take out new financing to perform the composition. If this causes material harm to the interests of the collective creditors, the law offers the court the possibility to withhold its confirmation (sub-subsection f). If the composition was achieved through unfair means, such as deceit or preferential treatment, the court will also refuse to confirm it (sub-subsection g). The fees and advances payable to the court-appointed restructuring expert, other experts and observer must be guaranteed; if they are not, this also constitutes grounds for refusal.
Catch-all provision (sub-subsection h)
The final general ground on which the court may refuse to confirm the composition covers all “other reasons that stand in the way of confirmation”. This is an open standard, giving the court a degree of latitude to consider previously unforeseen grounds for refusal.
Additional grounds for refusal
If the composition qualifies for refusal on at least one of these general grounds, the court will turn down the request for confirmation, without reviewing the composition’s actual substance. If any of the parties invokes an additional ground for refusal under subsection 3 or 4, however, the court will also need to perform a substantive review, and essentially determine whether the composition is reasonable.
Best-interest test (subsection 3)
If it is made plausible that creditors or shareholders that voted against the composition, or that were wrongly excluded from voting, would be placed in a worse position under the composition than if the debtor’s assets were liquidated in insolvency proceedings, they may request the court to refuse to confirm the composition. This is referred to as a “best-interest test”: creditors and shareholders may not be placed in a worse position as a result of a court-mandated composition than they would be as a result of bankruptcy proceedings, unless they themselves agree. The court must be able to determine this to a plausible standard.
SME minimum, absolute priority rule, absence of a cash exit, liquidation value for secured creditors (subsection 4)
Section 384(4) Insolvency Act sets out a number of additional grounds on which the court may refuse to confirm a composition. At the last minute, a clause was added under which every SME creditor is entitled to receive a minimum of 20% of its claim (subsection 4(a)). This standard could potentially create a high threshold, particularly in practice: which creditors qualify as SMEs, and how do you compose 20% of their claims? Next, subsection 4 also contains the Dutch version of the “absolute priority” rule, which states that a creditor with a lower order of priority cannot be paid more than a creditor with a higher order (except if valid grounds exist to do so). The third ground for refusal comes into play if creditors do not have the option of a “cash exit”, i.e. payment in cash. Lastly, confirmation will be refused if a secured creditor is offered only shares or depositary receipts, without the option of another form of payment. This final ground was also based on an amendment that was presented and adopted at the very last, which deprived secured creditors of the possibility of also choosing a cash payment – now, all forms of payment are acceptable except shares and depositary receipts.
Conclusion: be involved in the process and speak up on time
The basic rule is that the court will agree with any request to confirm a court-mandated composition. However, the CERP Act also presents grounds on which the court may withhold its confirmation. The court will review the general grounds for refusal either on its own motion or at a stakeholder’s request, and if any of the stakeholders so asks will examine whether any of the additional grounds for refusal apply. It is very important for all creditors involved to promptly object to any elements of the composition that harm their interests: if they do not, they risk not having the option of requesting the court to refuse to confirm the composition. Only by objecting on time will creditors be certain of being able to invoke such features as the SME minimum, the best-interest test and the cash exit.