CERP Act: court-mandated compositions
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.
The CERP Act principally applies to companies that are at risk of becoming insolvent as a result of excessive debt, but still have some viable operations.
However, the CERP Act can also be used for compositions to wind up companies that have no chance of surviving: in those situations, the CERP Act can be applied if winding up the operations through a non-insolvency composition will achieve a better outcome than if the operations are wound up in insolvency proceedings.
If a company finds itself in a situation where it is reasonable to assume that it will be unable to continue to pay its debts, its creditors or shareholders or the company’s works council or employee representatives may initiate proceedings under the CERP Act. This gives them the opportunity to petition the court to appoint a restructuring expert. The company’s board of directors may also ask for a restructuring expert to be appointed, to avoid being caught up in a conflict of interests between the company’s shareholders and its creditors. Accordingly, before petitioning the court to appoint a restructuring expert, the board does not need to obtain approval from the shareholders.
The CERP Act is intended primarily to protect the company and associated interests, including those of the company’s employees and creditors that would prefer the company to remain operational, from creditors or unwilling shareholders seeking to block a rescue attempt. The role of the restructuring expert is to endeavour to prevent the looming insolvency scenario from actually manifesting. In particular if it seems that the debtor is reluctant to take the necessary action, the importance to the collective creditors and other stakeholders of appointing a restructuring expert is self-evident.
In many cases, moreover, the company’s board of directors will be losing, or will already have lost, the trust of some stakeholders. Concerns about abuse of the CERP Act may also be a factor. An external restructuring expert can help to overcome the differences between the board and those stakeholders, and create renewed faith in the process and so increase the likelihood of a successful outcome.
Duties and role of the restructuring expert
The restructuring expert can prepare a proposal for composition and then set the composition process in motion. The first step in that process is to present the composition to the creditors and shareholders for a vote. If the debtor is an SME, the restructuring expert requires the debtor’s consent before taking this step.
To ensure that they can do a proper job, the CERP Act states that restructuring experts:
- must be given access to the company’s complete accounts and records and other relevant company information; the restructuring expert may only share this information with others in so far as this is necessary to bring about the composition, and the sensible approach would be to make arrangements about confidentiality;
- must be given all information and cooperation that is necessary for the restructuring expert to properly carry out his or her duties by the company and everyone who is directly involved (board of directors, shareholders, supervisory board and employees), both on request and on their own initiative;
- may request a cooling-off period;
- has the possibility to restructure contracts that are in place;
- may refer potential disputes to the court to obtain greater certainty about the vote on the composition, and the outcome of that vote, in the interests of deal certainty;
- may ask the court to impose facilitating relief measures to protect the interests of the creditors and shareholders concerned.
It is important to realise that the debtor, or its board of directors, retains control of the operations and can continue running them while the composition proceedings are underway (“debtor in possession”). As such, the authority to perform any and all juristic acts remains exclusively with the debtor. This is a material difference compared with insolvency, where the board loses control of the operations entirely, or a suspension of payments, where it loses control in part.
In order to offer a composition, the restructuring expert will also need to examine every aspect of the company, and must be given frequent updates by the board on the company’s current finances. The restructuring expert needs to know how long the company will still have sufficient cash on hand to continue its operations, and therefore how much time is left to complete the composition process. This means that it is vital that the board of directors must work closely with the restructuring expert in order to bring about the composition.
The restructuring expert’s duties in practice
Restructuring experts must carry out their duties effectively, impartially and independently. To be able to do this, a restructuring expert must be a financial expert with an understanding insolvency law who also has experience with restructuring companies’ debts. In international cases, if the court feels that this is advisable, it may also appoint an insolvency officer in foreign insolvency proceedings as the restructuring expert.
Additionally, once a restructuring expert has been appointed, he or she may be expected to be capable of dealing with the influence exerted by the various stakeholders, including shareholders. It is also the restructuring expert’s task to convince the board of directors that the composition process is necessary; this is important, as composition proceedings have virtually no chance of succeeding unless the restructuring expert can work together with the board.