For many companies, an industry pension fund is often one of its biggest creditors. However, 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) on 1 January 2021 raises a number of issues concerning those pension funds. It is important, therefore, for both companies in financial distress and the industry pension funds themselves to understand what the legal position is of those pension funds.
Do industry pension funds also fall under the scope of the Dutch Scheme?
The purpose of the Dutch Scheme is to make it easier for distressed companies to restructure their debts. So what does this mean for claims of mandatory industry pension funds for overdue pension contributions? In the Dutch Scheme, does a composition’s binding effect extend to those creditors as well? On examination, this is quite a difficult question to answer. What complicates the matter is that the CERP Act makes an exception for employees’ rights under their employment contracts. With the introduction of the new legislation, this exception is laid down in section 369(4) of the Dutch Bankruptcy and Insolvency Act (Faillissementswet). So if employees’ rights are excluded from the Dutch Scheme, does this then also extend to the claims of industry pension funds?
An examination of the Parliamentary background to the CERP Act reveals that the legislature has not made any explicit pronouncements one way or another. However, the Parliamentary background to the Dutch Pensions Act (Pensioenwet) indicates that a pension is an employment benefit, and that pension agreements contain arrangements about a pension as an employment benefit. Mandatory industry pension funds are based on the legal fiction that a pension agreement is in place. Not only this, but some years ago the Dutch Supreme Court rendered judgment in a case concerning a transfer of undertaking, and found that claims of industry pension funds for unpaid pension contributions qualify as rights and obligations under an employment contract within the meaning of section 663, Book 7 of the Dutch Civil Code. With this in mind, it could be argued that industry pension funds’ claims are likewise excluded from the Dutch Scheme.
However, it is doubtful whether this was in fact what the legislature intended with the CERP Act. Furthermore, although the Supreme Court ruled that, for the purposes of transfers of undertaking, industry pension funds’ claims for overdue pension contributions may be equated to the employees’ claims, this judgment was not given in the context of section 663, Book 7 of the Dutch Civil Code. For the Dutch Scheme, an effective application of the new legislation in fact implies that the exception does not extend to industry pension funds, nor does its Parliamentary background contain any clear arguments to support that it should. The Explanatory Memorandum to the CERP Act only states that specific rules are in place for employees, which have been aligned with the Dutch Work and Security Act (Wet Werk en Zekerheid) and the Dutch Balanced Labour Market Act (Wet arbeidsmarkt in balans). That legislation (specifically referenced in the Explanatory Memorandum) does not concern industry pension funds’ claims for unpaid pension contributions. Nor does the Parliamentary background to the CERP Act contain any indication that the legislature considered claims of industry pension funds.
Effectiveness of the Dutch Scheme
Given what the Dutch Scheme is intended to achieve, it seems more logical that industry pension funds’ claims for unpaid pension contributions should in fact fall within the scope of the CERP Act. The legislative text and its Explanatory Memorandum also bear out that this is the most plausible interpretation of the new section 369(4) Insolvency Act; otherwise the Dutch Scheme would be much less effective in many situations. Potentially it could even lead to enforceable compositions and restructurings being blocked, since it would be relatively easy for industry pension funds to use enforcement orders to levy attachment in execution on a distressed company’s assets and putting the restructuring attempt at risk. Moreover, industry pension funds could potentially steer the debtor towards insolvency and so undermine the Dutch Scheme’s effectiveness.
Industry pension funds are generally among a company’s biggest creditors, and in practice excluding them could render restructuring efforts futile. Therefore, it seems unlikely that the legislature intended to exclude industry pension funds’ claims from the scope of the Dutch Scheme.
Points of attention for the board of directors
If industry pension funds do in fact fall under the scope of the new legislation, board members of distressed companies need to realise that involving an industry pension fund in an extrajudicial composition could also have personal consequences for them in some situations: if the company failed to properly disclose its inability to meet its payment obligations, or failed to disclose it in time, the industry pension fund can hold the members of the company’s board of directors liable for the overdue pension contributions. If a situation arises where the inability to pay was not properly disclosed, the law presumes that the board members are liable on grounds of mismanagement. Besides the company itself, the industry pension fund can then also hold the board members personally liable for the unpaid pension contributions. While the board members could normally seek redress against the company, if the Dutch Scheme has come into play their rights of redress will generally be limited. This is a factor for boards of directors of distressed companies to bear in mind: the composition does not need to be offered to all the company’s creditors, and sometimes they might prefer to offer the composition to some creditors, but not to others. For the board of a distressed company that failed to disclose its inability to fulfil its payment obligations, the limited right of redress could be reason to exclude the industry pension fund from the composition.
Factors for industry pension funds to consider
In addition, board members facing risks of liability could seek to structure an enforceable composition in such a way as to include a discharge from liability. Creditors should pay close attention, to make sure that a proposed enforceable composition does not specify such a discharge from liability: in principle it will only have binding effect if they agree to it. In other words, a wise board of directors should stipulate a discharge from liability in the composition, and wise creditors should examine the text of the enforceable composition that is offered closely to see if it contains such a clause, and not agree to the composition unless they in fact wish to discharge the board of directors from liability.
As matters stand, the legislature has given the judiciary the job of determining whether industry pension funds’ claims also fall under the Dutch Scheme’s scope, and presumably case law will be handed down on this issue. I believe that the new legislation will only be effective if the Dutch Scheme also applies to industry pension funds. For the board of directors of a distressed company that did not make a valid disclosure of its inability to fulfil its payment obligations, this could mean limited possibilities for seeking redress against the company if the members of the board are held liable by the industry pension fund. It is important for those board members to be aware of this: they might try to stipulate a broad discharge from liability in the enforceable composition, but creditors that are unwilling to discharge the distressed company’s board of directors are not, as a rule, obliged to do so.
To find out more about the Dutch Scheme, claims of industry pension funds and disclosure of an inability to fulfil payment obligations, see: M.H. Visscher, Van bange bestuurders naar creatieve bestuurders als het om pensioenschulden gaat?, TvOB 2020, issue 6, pp. 215-222.